View from City Road: Opec showing signs of strain
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Your support makes all the difference.YESTERDAY's sharp rise in crude oil prices has done little more than underline the weak fundamentals affecting the sector. The mere hint of an Opec agreement to scale back daily production by 1 million barrels pushed up Brent prices for March delivery to dollars 17.90 a barrel, almost dollars 1 higher than just last week.
Such an advance is unlikely to be sustainable. Although it was Saudi Arabia, supported by Iran, that suggested over the weekend that all Opec members reduce output in proportion to their market share, the organisation is showing signs of strain.
Kuwait, albeit a relatively small producer, is reported to be unwilling to cut volumes on account of its post-Gulf war reconstruction bill. Other Opec members may also find the proposal hard to stomach because much of Iraq's share within Opec was taken up by the Saudis. They may well argue that the brunt of the proposed cut will not be distributed equitably.
That said, the oil market has been gloomy enough to concentrate minds at next month's Opec meeting in Vienna. Oil prices have collapsed from about dollars 21 a barrel since last autumn, making life increasingly uncomfortable for many oil exporters.
However, the eventual return of Iraqi exports will continue to unsettle prices. Meanwhile, economic conditions in Europe are worsening and demand in Japan and the US remains sluggish.
In the absence of a serious disruption to crude supplies, prices are unlikely to show any lasting advance and will be influenced more by sentiment than fundamentals.
In consequence, trading in oil shares can be expected to remain volatile. Although they could benefit from sterling weakness, investors should limit their exposure to financially strong companies. Among pure exploration stocks, Enterprise and Hardy provide a relatively safe haven. Both companies sport a respected management team and also offer some upside potential from drilling success. Lasmo should be sold.
Among integrated companies, Shell, which at 530p offers a higher yield than British Petroleum at 231.5p, remains the obvious choice. With a strong balance sheet and a global reach, it is also far better placed than BP to withstand the dismal conditions in petrochemicals and refining.
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