Monday 23rd June 2008

OPEC to Boost Oil Output but Little Impact on Prices Expected

A summit held in Jeddah over the weekend which included representatives from all the major oil producing and consuming nations resulted in somewhat of a stalemate, as few of those on the supply side agreed that action was required by producers in order to curb the rising cost of oil. Although blaming speculators for record prices, Saudi Arabia as head of OPEC has though agreed to increase production by 200,000 barrels per day by the end of July. Saudi King Abdullah bin Abdul-Aziz stated that he was concerned about the global economic instability caused by higher prices and re -affirmed that, “We declare our readiness to meet any additional needs.”

Doubts that the summit will have any significant short-term impact on prices due to the continuing attacks on infrastructure in Nigeria and growing tensions between oil companies and the Kremlin were confirmed this morning as crude remained above €136. The weekend has also emphasised the widening rift amongst OPEC’s members over how the cartel should react to the demands of consuming nations to increase supply. Several members including Algeria and Qatar have argued against increasing supply because speculators will drive up the price of oil whatever the production levels, whilst only Kuwait has publicly declared it is willing to follow Saudi Arabia’s route if required. Gordon Brown announced during his speech to the summit that Britain’s energy industry would be opened up to encourage investment from oil producing nations in order to advance alternative energy sources.

Last Friday’s EU meeting in Brussels also witnessed disagreement amongst leaders on a number of issues including the Irish rejection of the Lisbon Treaty and the possible future enlargement of the bloc. President Sarkozy expressed his belief that the EU could not be expanded to include countries such as Croatia without the treaty being in place. This view was supported by a number of leaders including Angela Merkel, however others such as Silvio Berlusconi argued that enlargement should take place sooner rather than later.

In the markets, Friday capped a miserable week for the FTSE 100 as it ended the week down 88 points at 5620. On Wall Street the Dow fared little better slipping 1.9% by close of trading on the back of growing concerns over possible further downgrades in the financial sector. In the currency markets sterling fell against the euro as traders became less confident in a UK rate change and ended the week down 2% at 1.26. Preceding this week’s Fed announcement on interest rates the dollar posted its biggest weekly decrease (3%) against the euro as EURUSD finished at 1.56, whilst cable closed at 1.97.

There are a number of important reports due for release this week including today’s German IFO business survey, which will be closely scrutinised after last week’s ZEW index reported that investor confidence had fallen to its lowest level for almost 16 years. Tuesday will see the release of data in the US on consumer confidence before Wednesday’s Fed announcement on interest rates. The market is predicting that rates will be kept on hold at 2% on the back of gloomy data still emanating from the housing market. In relation to the UK, the CBI’s Distributive Trades Survey will be released on Wednesday and will be significant as it is acknowledged that both the BOE and UK government place greater weight on the report as an indicator of short-term trends in the retail sector than last week’s consumer index. The week ends with the release by the Office of National Statistics of the finalised UK GDP figures for the first quarter of 2008.

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