Threadneedle: Outlook for the oil sector

David Donora, Threadneedle's Executive Director of commodities comments on the outlook for the oil sector.

What are oil price expectations for the rest of the year?

"I expect the price of oil for the rest of the year to remain firm. The markets corrected following the strong run in May and June and have begun to carve out a range. My view is based on the fact that US demand remains weak, with little prospect for demand growth, and inventories are at historically high levels. This is counterbalanced by the re-emerging growth in Asia and other emerging market countries where demand is already picking up. Additionally, there is little prospect for increased production over the second half of the year."

How could a negative or positive shift in oil prices affect markets?

"Strong oil prices, but not too strong, are generally supportive of equity markets particularly in oil producing countries such as Russia. However, it is useful to recall that through the 90's oil prices remained subdued and equity markets worldwide performed well."

How would a negative or positive shift in oil prices affect the commodities market in particular?

"A positive shift in oil prices serves to support other commodities such as grains and sugar where they are used as a biofuel feedstock and energy cost is a meaningful component in the cost of production."

How would a drastic rise or fall in oil prices affect inflation?

"A drastic fall in oil prices would reduce inflation - directly and almost immediately, and then as the lower cost of production filters through energy intensive industry, there would be ripple effect leading to lower prices. Generally speaking, inflation is not a concern at the moment and I think Central Bankers have been reasonably happy that the price of oil has recovered from the lows posted early this year. I suspect that if oil starts the march to $100 per barrel, there would be concern as it would stifle global economic growth - as it did in the 3rd and 4th quarters of 2008. It is clear that the sharp economic collapse was exacerbated by the oil price spike."