Global demand for oil unlikely to fall

Demand for oil on the global markets remains robust as demand in developed markets is unaffected by the debt crisis as emerging markets consumption continues to soar.

Developed economies’ consumption of oil has continued to grow since the global financial crisis in 2008, indicating that the developed economies have reached a demand pattern that is inelastic to price, says Angelos Damaskos, chief executive of Sector Investment Managers and fund adviser to the Junior Oils Trust.

Established standards of living in the developed economies have supported oil consumption through the debt crisis and cannot fall much further, says Damaskos. But consumption in China and India, with a population mass of more than 2.5 billion people, and growing, is expected to keep pace with industrialisation.

“Around two-thirds of the world’s oil consumption goes to power transportation such as ships, trains, trucks, cars and planes – all needed for world trade. If three years of economic hardship have failed to reduce the need for oil, it is unlikely that demand will collapse now,” says Damaskos.

Brent crude continues to trade at around $112/barrel, well above the five-year average in US Dollar terms and near all-time highs for the Euro and Sterling. These prices generate record profits for oil companies, especially those that concentrate in exploration and production operations. Despite recent strong share price recovery, oil shares are trading at historically low multiples, indicating that further re-rating is also possible.

On the supply side, says Damaskos, there is little spare capacity. “Middle-Eastern and North African instability has meant that the world’s most significant oil producing region is aiming to keep prices high, at least above $100 a barrel, to keep its people happy.”

In the rest of the world, major new oil finds occur in deeper waters and more complex geological formations with higher marginal cost of production. Production from such new sources may ensure oil does not run out in the foreseeable future, but prices will be high to bring it to market.

Oil shares, therefore, continue to offer attractive investment potential. Concentrating in smaller, production focused companies with active exploration activities should be a winning strategy over the long term, outperforming both the larger-capitalisation integrated oil companies as well as the commodity price.

Sector Investment Managers is an independent resources-focused investment manager authorised and regulated by the UK regulator. It advises three open-ended fund products, Junior Gold, the Junior Oils Trust and the Junior Energy Fund, as well as providing advice and management for segregated accounts. Damaskos founded Sector Investment Managers in 2004 to provide investors with diversified access to the super-cycle in energy and commodities.

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