Highlight | Oil Price

Oil traded above $88 a barrel recently for the first time since October 2008, prompting enthusiastic speculation that we might see $100 barrels again in the not too distant future.

The last time a barrel of oil cost more than $100 was back on 2 October 2008, when the unfolding financial crisis had the commodity in the middle of a fantastic fall from $147 down to $33 in the space of just six months. From that low, the oil price has been steadily climbing: stimulus measures have added liquidity to markets, driving investors to relatively safer investments in commodities, and the recent decline of the dollar has added extra impetus to oil's rally.

Impact on shares

As a general rule, rising oil prices are likely to affect corporate earnings by driving up costs, which will weigh on both individual shares and stock indices. The FTSE^® 100, however, contains several heavyweight oil firms which are likely to do well on more costly oil - this could counter any negative impact on other index constituents.

Shell announced third-quarter results on 28 October that were better than analysts’ estimates, with both production and profit up compared to the same period the previous year. Shell produced three million barrels of oil per day during this period, up 5% from last year’s third quarter, while profits excluding one-offs and inventories were up from $2.6 billion last year to $4.9 billion.

Following record losses in the previous quarter, BP announced a rapid return to profit in the its last three months. The London-based oil firm unveiled profits of £1.1 billion, and has seen its share price soar from a low of 296p at the end of June to its current price of around 425p. This is still deep down the well compared to the 658.2p price the day before the Deepwater Horizon oil spill, but it does show an important turnaround in performance and sentiment in the company.

Is $100 a barrel inevitable?

The trend in recent years has been that more liquidity in the economy has pushed investors towards commodities, especially energies, and the injection of stimulus measures across the world as part of the global economic recovery has helped to provide that liquidity in the global market place. The latest quantitative easing measures announced in the US, dubbed QE2, have already had an impact, applying more negative pressure to the US dollar and, in so doing, driving oil prices, seemingly inexorably, towards $90 per barrel.

Analysts, however, are split on what is in store for oil. On the one hand, there looks to be real upward potential for oil when one considers the second round of quantitative easing recently announced in the US, the anticipated continued growth and demand in developing countries, and the higher-than-expected prices that energy companies are asking for their reserves. Conversely, however, some analysts have argued that this is a well-supplied market, and therefore the likelihood of a move towards $100 per barrel is largely exaggerated.

Wide range of markets

You can take a position on a variety of energies markets with IG Markets, as well as a range of other hard and soft commodities. Alternatively, we offer more than 8000 leading international shares and global stock indices.

Take a position

If you are not already an IG Markets client you can apply online and open an account in minutes to start trading.

Updated: 16/11/10

The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.