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Having been a little over $20 at the outbreak of the second Gulf War in 2003 and just over $50 at the start of 2007, the price of a barrel of oil broke through $100 at the end of February and has carried on rising since. While industry analysts are predicting a retrenchment below $100, fund management group, Threadneedle, believes that this view is naïve.
Dominic Rossi, Threadneedle's Head of Equities, says oil analysts have been consistently behind the curve as the oil price has risen. And he thinks they are still behind the curve now.
"We can't see oil falling below $100 from here and it's time investors accepted triple digit oil and started positioning portfolios accordingly."
Sustained high oil prices have many implications at the sector and geographical allocation level in equities, according to Rossi. At the country level, for example, there is an ongoing massive transfer of wealth from oil importing nations to oil-rich countries - the big winners in this regard being markets such as Brazil and Russia.
The losers are countries such as the US, which consumes 25% of world oil but produces just 8%, and Japan, which consumes 6% and doesn't have any production.
In terms of sectors, Rossi sees plenty of opportunities: "As ageing oil reserves run down and the search for new reserves pushes into ever harsher territory, specialist oil services companies are set to benefit.
"The North Sea oil fields of the 1980s were in 100 metres of water but new discoveries like Tupi off Brazil are 2km below the sea, with a thick layer of rock to get through as well. These inhospitable conditions call for specialist equipment, and supply/demand imbalances mean that the suppliers of this kit are price setters."
The opportunities aren't just limited to oil industry plays, however. Indeed, as less developed countries get richer and credit becomes more available, consumer-related sectors like retail, real estate and mobile telecoms will continue to develop says Rossi.
Meanwhile, governments are using oil profits to rebuild infrastructure on a grand scale. Consequently, the companies supplying these programmes, such as heavy equipment manufacturers, steel companies and cement producers, are all overweights as far as Threadneedle is concerned.
15 May 2008 © Moneyextra.com
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