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Lex: Oil prices

Financial Times: Lex: Oil prices

Wednesday 15 June 2005

The only certainty about the oil price is the inability of forecasters to predict it. Ask a New York futures trader what the long-term oil price is and the current answer will be $54 a barrel for 2011. Analysis by Goldman Sachs suggests that European oil sector equity valuations discount a longer-term forward Brent crude price of $30. Integrated oil companies, however, are still using prices of $20-$25 to assess investment projects.

Faced with such confusion, investors are taking a very short-term view. Citigroup highlights the close correlation this year between European sector performance and daily movements in one-month forward Brent crude prices. With the industry returning cash, investors, understandably, are focusing on near-term cash flows. The macroeconomic picture for the oil market looks bullish for the latter half of the year. On recent trends, this suggests further sector upside.

Meanwhile, there are signs that sustained crude strength is filtering through to oil company forecasts. Last week Lord Browne, BP chief executive, said prices could remain above $40 for three to four years. On Monday, Jeroen van der Veer, Royal Dutch/Shell chief executive, said sustained heavy investment in costly projects would require higher long-term prices than in recent years. As the oil majors accept a “stronger for longer” view, it can only be a matter of time before, implicitly or explicitly, they use higher prices for investment decisions.

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