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Oil: friend or foe?

Oil prices in the third quarter were eight per cent below the average price last year. When OPEC caught the market off guard by agreeing to cap output for the first time in eight years West Texas Intermediate crude jumped to over $50 per barrel.

The stand adopted by OPEC changes the commodity scenario going forward as the decision implies that OPEC countries are not happy with a price lower than $50 per barrel. In the meantime, Russia appears committed that it is ready to enter talks with the cartel with the intention of limiting oil production.

The price of oil

The global supply of oil is unlikely to adjust drastically in the short-term. Despite all the intentions, most OPEC members will still be pumping at 100 per cent in the near future. Any scaling back will likely depend on Saudi Arabia and Russia. However, higher prices will likely provide a lifeline to shale producers.

Given the above, the price of oil is unlikely to adjust below current levels, however, bulls will likely be disappointed as any increase in price will risk bringing back online idle production.

The winners

Stable oil prices provide a lifeline to many oil producing countries that have seen their fiscal balances crumble with the price of oil. In fact, it may have been the first hints of civil unrest that drove Saudi Arabia back to the table.

Russia will also get a significant boost in its attempt to regain world power status and influence. Following the annexation of Crimea and intervention in Syria, the country’s military spending ballooned; the cost is being transferred to the population in the form of inflation and lower living standards.

Oil shares are the obvious beneficiaries from an increase in the price of oil. Higher oil prices will also support the high yield fixed income market, especially the US high yield market that has a high percentage of shale producers.

The losers

The only losers may be consumers which will see oil related prices start to increase.

Second round effects

The increase in the price of oil will eventually trickle down in an increase of everyday prices.  Inflation may lead to an increase in demand. Central banks are already reacting to this phenomenon by signalling the possible reversal of monetary support.

In Europe, reversal of quantitative easing may still be far off, however, price stability in oil may be one link in the chain that would support an eventual economic recovery. Investment wise this may be the period to start considering changes in the long term positioning of asset.

Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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