Global equity markets suffered a big sell-off yesterday as concerns over the price of oil again threatened economic growth. Brent crude futures prices hit a record $76.18 per barrel in London trade as a combination of war threats in the Middle East, Iran and North Korea and violence in Nigeria pushed prices higher with no sign of weakening demand. The FTSE 100 fell by 95.6 points, its biggest fall for a month, while the Dow Jones closed down 166.89 points after falling 121 on Wednesday.
In Hong Kong, the Hang Seng was down 216 points overnight, while in Japan, the Nikkei dropped more than 150 points. The FTSE 100 should benefit more than other markets because of its heavy weighting in oils stocks, with BP, Shell and Cairn Energy making up almost one quarter of the total index. However, if the oil price continues to rise there will be no escape from higher costs and slowing economic growth.
Only a month ago, BP's chief executive, Lord Browne of Madingley, predicted that long-term oil prices would eventually fall to below $30 per barrel, a prediction that now looks less credible. Increased use of technology and exploration success may drive prices down eventually, but with increasing political and military tension in the world's oil-producing nations and unquenchable demand from developed and developing economies, the oil price is showing few signs of any meaningful decline.
Georgina Taylor, a UK equity strategist at the investment bank Goldman Sachs, says that stock markets have been slow to price in higher oil prices. She said: "The oil price has been ignored to a certain extent, and while forecasts for cost increases are rising the market is still behind the oil price. Should the price of oil rise to, say, $100 per barrel, there would be a hugely negative impact on global equity markets, real incomes and growth. That said, the London market should be best positioned of the major markets to benefit from a higher oil price and fundamentally UK equities remain good value."
Despite concerns over the oil price and yesterday's record prices, in real terms the per-barrel value was higher during the oil shock of the 1970s. According to BP, oil hit an inflation-adjusted average of $87.65 per barrel during 1980, a period also marked by high inflation, slow economic growth and higher interest rates. Even so, oil is more expensive in real terms now than it has been since 1983.
One oil trader said: "Last year, global geopolitical tensions were exacerbated by the extremely active hurricane season in the United States. All the predictions are that this year will be every bit as active, and the situation in Israel looks like it is spiralling out of control."
He added: "In these circumstances, oil prices are only going to head in one direction. Unless Opec bows to political pressure from consumers and opens the floodgates, oil is going to stay expensive for the foreseeable future."Reuse content