The price of oil has spiked to its highest level for more than two years following the discovery last week of a hairline crack in a pipe near Netherley, Aberdeenshire.
The pipe is part of the Forties Pipeline System, the main system carrying North Sea oil which, it was confirmed today, must now be shut in order for repairs to be made. The closure is likely to last “several weeks rather than days”, according to a spokesman for Ineos, the pipeline’s owner.
As a result, benchmark Brent crude rose this morning by 1.6% at one point to $65.70 a barrel, a level not seen since the summer of 2015.
The reaction elsewhere in markets was swift, too. Shares in BP and Shell both rose, by 1.5% and 1.45% respectively, continuing a winning streak that began last week after the discovery of the crack. (The gains at BP, in particular, may be viewed ruefully at Ineos - BP sold the Forties Pipeline System to Ineos just six weeks ago.) Those gains helped the UK market overall to rise as well.
With the pipeline issue so specific to North Sea supply, and therefore the price of Brent Crude, it’s no surprise that there was no comparable impact on the price of West Texas Intermediate. As a result, the premium for Brent above WTI is now $7, the highest since May 2015.
The crack at the Forties pipeline adds to a complicated set of upwards and downward pressure currently effecting the oil price. A longer term factor has been increased production from the US, which is now pumping 9.71million barrels a day onto global markets, the highest level since the early 1970s.
That is making it harder for Opec (the Organization of Petroleum Exporting Countries) and other large producers such as Russia to dictate prices by limiting their supply. US production is now approaching the level of Saudi Arabia and Russia.
For both the economy and investors, higher oil prices have implications. More expensive oil means lots else will rise in price. Confirmation today that UK inflation has hit 3.1% underlines the pressure already on households. A further oil-driven rise will not be welcome and could harm already weak consumer sentiment.
It’s good news, of course, for the UK’s giant oil companies. They need a healthily high oil price to maintain the rewards offered to shareholders via dividends and share buy-backs. Earlier this year, BP claimed that oil had settled into a ‘new normality’ for the period ahead of between $50 and $55 a barrel. Today’s price improves on that.
Better prospects for oil companies also raises the incentive for investors to rotate out of some of the most overheated parts of the market.
Select 50 funds with exposure to the oil sector include:
Fidelity Enhanced Income, in which Royal Dutch Shell is the third largest holding.
The JOHCM UK Equity Income Fund, which has 15% of its assets in Shell and BP. Both are among the fund’s top three holdings.
The Invesco Perpetual Global Equity Income Fund, which holds Chevron.
And the Invesco Perpetual European Equity Income Fund, which gets its sector exposure via France’s Total.
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