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Your money matters: Oil uncertainty

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By Trevor Keidan
What a difference a year makes - especially when it comes to oil!

Earlier this year, analysts and pundits were saying that the oil bull market would have no end. Some were even predicting US$200 per barrel.

As it happened, in July this year the oil price rose to $147 per barrel before falling back.

Earlier this month, oil fell to its lowest level since 2004. On Friday, crude was about $40 per barrel and the future of the oil price looked far from certain even with Opec's production cuts.

On Wednesday last week, the Organisation of Petroleum Exporting Countries announced a production cut of 2.2 million barrels per day - its biggest ever.

An Opec press release on its website following a conference in Algeria stated: "The impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices, which have fallen by more than $90 a barrel since early July 2008".

However, the ongoing supply cuts have had little effect. In fact, they were predicted and factored into the price.

So what exactly is the future for oil?

Well, some forecast that the slump will continue into next year - even with Opec's recent production cuts.

Earlier this month, the oil price suffered a huge fall because of higher unemployment in the United States. The figures suggest that the economy is worse than expected and gave rise to speculation that oil demand will slump. After all, the United States still leads the world in energy consumption.

But the United States is not the only country to have an effect on the oil price. Economic powerhouse China - with its huge demand for energy - is also key.

Oil prices might also cause oil companies to review ... their existing projects.

And the talk is that China's economy will slow as a result of the global financial crisis. This, in turn, will affect demand.

So what are the prospects for 2009?
Well, many believe the low oil price will continue into early next year and are even talking about prices below $40 per barrel. Opec - on the other hand - has other plans.

The organisation would like to see oil at $70-$75. Some see this as unlikely given the state of the world economy. Some think that the oil price will not recover until 2010 or even 2011.

So what are the consequences of lower oil prices, apart from cheaper prices at the pumps?

At first glance, one might expect lower oil prices to be beneficial all round.

After all, heating (and air-conditioning) bills and flights will be lower. Production costs will also drop and cut the price of manufactured goods. In fact, there might be deflation across the board, and the United States might get a break from its massive growing deficit because it can spend less on energy.

However, it's not all good news. Some speculate that the short-term gain of lower prices at the pumps might turn into a long-term nightmare.

This, too, is a concern for Opec.

As it states on its website following its recent meeting: "If unchecked, prices could fall to levels which would place at jeopardy the investments required to guarantee adequate energy supplies in the medium-to long-term".

Oil prices might also cause oil companies to review - and possibly shelve - their existing projects because they are simply unsustainable at current prices. Oil companies will cut investment as well as production, and when the world comes out of recession, it will find itself in a position where oil is once again in short supply.

And this, in turn, will drive the price of oil up - again. It appears to be a vicious cycle - and circle. And it's one that we as investors should be aware of.

 Some people have asked me about oil and what will happen - perhaps with a view to investing. With this in mind, my recommendation is to decide on what time horizon you have for the investment. If it is short-term, then I would suggest stepping back and waiting. But for those with a longer-term view, I think the energy sector is a good bet.

Remember ...Your Money Matters!

_______________________________________________

Trevor Keidan is managing director of Infinity

Financial Solutions, a firm providing impartial, 

tailor-made  personal financial advice to

clients in Cambodia and Southeast Asia.

Should you wish to contact Trevor,

please send an email to tkeidan@infinsolutions.com.  

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