Gulf concerns to underpin crude

MARK ROBINSON | FEBRUARY 2012 | SOURCE: Investors Chronicle

A surge in oil prices is the last thing oil-importing countries such as the UK could do with right now, particularly given Europe's unresolved sovereign debt issues.

But, in reality, we've been living through a prolonged period of historically high prices. Perhaps we're becoming accustomed to the notion that this represents the new orthodoxy, but we shouldn't become complacent as to the implications of persistently high energy prices. 

Gulf concerns to underpin crude

A barrel of Brent Crude now costs $114 (£72), which is marginally ahead of the 12-month rolling average, but it's also just 11 per cent lower than the average achieved during the fevered three-month period prior to the oil price collapse of July 2008. Though oil price shocks don't always precipitate recessions; they generally prefigure them.

Conveniently, the UK economy switched into reverse during the final quarter of 2011, and industry analysts are warning that the political impasse over Iran's disputed nuclear ambitions has the potential to pump up the oil price, which could exacerbate the current downturn.

Of course, Iran may not be bluffing in its threat to shut down the Strait of Hormuz in retaliation for US and EU sanctions, but any such closure would also scupper Iranian exports to both India and China. And even if Tehran meant business, it's doubtful whether Iran has the logistical capability to make good on its threat.

Nevertheless, Iranian officials have warned Saudi Arabia and the other OPEC members not to ratchet-up production to offset the effect of the sanctions. But this could be largely academic as far as the Saudis are concerned as they have been operating at, or near, full capacity to compensate for lost Iraqi and Libyan output; so any increase may be out of the question anyway

IC VIEW:

Saudi Arabia will relish any situation that could potentially stifle Iran's influence within the region, and a resultant spike in oil prices is unlikely to upset anyone in Riyadh either. Saudi officials have already stated their intent to stabilise the average 2012 oil price at $100, which is 33 per cent higher than their previously avowed 'fair' price of $75.

This increased target reflects Riyadh's struggle to fund a projected budget shortfall, according to the Centre for Global Energy Studies. Oil at $100-plus could be the new normal, but, even though retail investors can invest in oil investment through ETFs, betting on the price of oil is best left to professional traders. We prefer equity plays on oil such as our long-term buy recommendations Shell and BG

Related article: Saudi Arabia vow to stabilise oil price at $100/bbl

Iran adds upward pressure to oil prices

Can the west survive without Iran’s oil?

For further insight, order The Potential Impact of Further Sanctions on Iran