City Watch: Oil prices could remain low for a while, says Charles Sylvester

Charles Sylvester of Charles Stanley & Co, Ipswich

Charles Sylvester of Charles Stanley & Co, Ipswich - Credit: Archant

The biggest news in the markets at the moment is the recent collapse in the oil price, which has seen Brent Crude fall from $116 per barrel about six months ago to a level of just over $60 today.

Most analysts believe the price may establish a new equilibrium between $70 and $90 per barrel although over the short term the current supply/demand equilibrium and hedge-fund speculation may well push it lower.

Of course on balance a falling oil price is positive for the world economy, encouraging growth and suppressing inflationary pressures. There are however variations by geography with the greatest divergence being felt across emerging markets where a weak oil price impacts asymmetrically, with oil producers deemed likely to lose more than the importing countries benefit.

The last slump in oil prices came just before the financial crisis in 2008; on that occasion they recovered relatively quickly, helped by Saudi Arabia cutting back on production. However at their meeting last week OPEC decided not to provide any artificial support and so supply and demand will have to adjust through natural market forces. This means that excess supply will need to be eroded either by an upsurge in demand or by non-OPEC producers cutting back on production, a process which will inevitably take longer to work.

It looks likely therefore that lower oil prices are going to be around for a while, with all the ramifications for geopolitical instability that this might cause.

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Perhaps two rather different politicians may be affected more than others. Mr Putin, who has been aggressively using Russian gas supplies to try and persuade other countries to view events from his perspective, and Nicola Sturgeon, whose economic strategy for Scotland rather depends on oil remaining over $100 per barrel.

: : Charles Sylvester is an investment manager with Charles Stanley & Co in Ipswich.

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