THE deteriorating relationship between Opec and other oil producers came to a head last week, as Russia rejected a request to commit itself to significant reductions in oil exports.
Opec, which has been trying to build bridges with other producers, is eager to restore the oil price from the current price of $18 to the established range of $22 to $28 per barrel. In order to do so Opec has stated that it is willing to cuts its supply, but only if non-Opec producers show some solidarity.
On the face of it, the fundamentals do not look good for the oil market. Expectations of a mild winter in the US coupled with the prospect of a stagnant US economy suggests demand will be subdued for a while to come.
On the other hand, there is the small matter of global politics. After the support the US has received from the Arab world over Afghanistan it may be wary of being seen to profit too greatly at the expense of Opec from the current circumstances.
The recent weakness of oil prices could, if sustained, help bolster the economic recovery by providing a considerable boost to purchasing power.
It should also help to keep inflation under control and enable central bankers to maintain their current interest rate policy.
The implications for the equity market are also positive. Although the oil sector makes up 16 per cent of the FTSE 100 index, the real benefit may be seen in the continuing outperformance of the mid and smaller sized companies in the market.
In conclusion, we feel that while the weakness of the major oil companies will affect the performance of the UK market in the short term, the benefits to consumers and businesses will enable the economy to withstand the threat of recession.
Simon Martin, associate director
l Gerrard is regulated by the Securities & Futures Authority. Share prices and the income from them can go down as well as up. Readers are advised to seek professional investment opinion before entering into dealings in securities mentioned in this article, which may be unsuitable in their personal circumstances
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