The oil price hit a record of more than $86 a barrel on Monday. Tensions on the border between Turkey and Iraq, as Turkey threatened military action against Kurdish guerrillas, were blamed as the “main driver” of the price rise, says Nas Nijjar, a trader at CMC markets on Thomson Financial.
But, as ever, it’s not just geopolitics that’s driving up the price of the black stuff. Last week, the US Department of Energy revealed an unexpected fall in gas and crude oil stockpiles leading into the winter months. And Americans might not be the only ones feeling the chill this Christmas, as the International Energy Agency reported oil inventories in the world’s largest industrialised countries are at a five-year low.
But whatever the reason behind the rise, it’s likely to stay there; oil cartel Opec said it would cut production by 110,000 barrels a day in the fourth quarter, while demand remains resilient. The US Energy Information Administration says that global oil demand will increase 1.78 million barrels a day, or 2.1%, on the same period a year ago. Citigroup says that a run at $90 a barrel is now “reasonable” because of US dollar weakness and strong demand.
British motorists, already paying around £1 a litre of petrol, could soon be forking out a lot more. But it’s not just the nation’s car owners who will be feeling the squeeze. According to George Buckley, chief UK economist at Deutsche Bank, in The Times, “This is going to affect companies who find it more difficult to invest and it will also affect the high street, as households simply won’t have as much money to spend.”
Of course, it’s not bad news for everyone. Oil stocks were in demand – and one oil major in particular. “BP remains our top pick in the sector,” Henk Potts, a strategist at Barclays Capital, told The Times. Positive comments on the beleaguered group continued after last week’s announcement that it would embark on major restructuring. The news came after new chief executive, Tony Hayward, described BP’s (BP) operational performance in the third quarter as “dreadful”.
“We believe the third quarter should prove to be the low point for BP operationally. Over the next 15 months, we expect the start-up of several key oil fields and the return to full action of BP’s two US refineries to lead to an improvement in sentiment”, said analysts at BP, who maintained an overweight rating on the shares with a price target of 675p.
But it’s not just the majors who have been seeing the benefits of a higher oil price. Speculation is rife concerning further consolidation in the oil sector, following Italian major Eni’s £1.5bn bid for Burren Energy (BUR). Shares in Burren rose 30% after the £10.50 a share offer was rejected. The bid looks like “part of a dash for assets by oil giants and national oil companies”. That will put Burren’s peers – the larger independents – on bid alert, says Grant Ringshaw in The Sunday Times, with “the pick of the bunch” being Dana Petroleum (DNX), Soco International (SIA) and Tullow Oil (TLW), he says. Premier Oil (PMO), which received a takeover approach last year, will also be on the radar. “The bidding battles will be fierce, and it is time to buy in.”