Alliance Trust investment comment on oil

Alliance Trust Global Oil and Natural Resources Analyst Angus McPhail comments on yesterday's (9 September 2008) OPEC meeting and the latest IEA report out today.

Angus McPhail said, "OPEC's decision to cut production by half a million barrels will help to underpin oil prices and maintain them at around US$100/barrel. OPEC countries have actually been overproducing by about one million barrels per day and this has dampened oil prices from their June peak of US$147/barrel. So yesterday's cut will only lower OPEC's existing overproduction.

The latest report from the IEA points to continued demand weakness. However, much of this slack in demand is being offset by supply problems. For instance, the closure of the Baku-Tbilisi-Ceyhan pipeline and the Gulf of Mexico shut-downs equate to over 50 million barrels of production lost this quarter, or 58% of what is required on a daily basis globally.

Worries that a continued slowdown in economic growth in non-OECD countries may erode demand further appear unfounded. This is because oil accounts for a lower proportion of the energy mix in those countries, relative to OECD and, notably, US-based consumers.

Future policy will hinge around OPEC's determination to stabilise oil prices at around US$100/barrel with the ongoing trend of latent demand being the key figure to watch, rather than supply."