Oil spoils the party

By Chris Sleight26 February 2008

Share prices continued to rally in the early part of October, but unfortunately they were not the only things going up. October 19 saw oil prices break the US$ 90 mark for the first time – an unlucky bit of timing as this was also the 20th anniversary of 'Black Monday'. This 1987 stock market crash was the largest single-day stock market decline in history with, among others, the Dow losing 22.6% of its value in a day.

Twenty years on and there was nothing like this level of market distress at the spiking oil price, but it clearly had a noticeable impact and brought the late-summer rally to a halt. Having spent a good two weeks of early October back above the 14000 point mark, the Dow fell back in the final days of the month.

The net effect of this between weeks 38 and 43 was for a marginal 0.95% drop for the Dow, a movement that was mirrored by the Nikkei 225's 0.79% fall. The FTSE followed a similar pattern, but with a slower build-up and shallower fall being seen in the UK, this translated to a 1.87% rise over the five-week period.

The same was true for global crane manufacturers' shares, which had their ups and downs over October, but generally finished week 43 up on their positions five weeks earlier. The IC Share Index managed a 2.21% net gain over the period. However, like the Dow, it went much higher than its 662.52 points finishing place over the course of the period. Mid-October saw it break through the 700 point barrier for the first time since mid-July, just prior to the slump that the sub-prime crisis triggered.

Oil highs

One the one hand, this provides more evidence that the markets have recovered their confidence following the summer's global credit crunch. But just as this problem recedes, the issue of oil prices is back in play. This is a problem to any business that needs to transport physical goods to market because almost all energy for transport is derived from oil. Rising oil prices therefore hit the profits of all companies producing physical goods.

As ever though, the impact on share prices is about the future, and investors are worried about how much higher oil prices will go. This is a big question as fast growing emerging economies gain in size on the world stage. Their above average economic expansion implies above average growth in oil consumption, so prices are likely to go higher until the supply side catches up.

This should probably be measured in years. Increasing supply means more extraction and more refinery capacity or the development and acceptance of alternative fuels such as bio-diesel and ethanol. None of these can happen overnight.

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