CITY analysts are scrambling to revise down their FTSE 100 forecasts amid fears that surging oil prices could make the bear market the longest running in the post-war period.
Stock market watchers will today cast a nervous eye over oil prices amid fears that American crude, which is set to break through $50 a barrel, could stay high for 18 months or more. On Friday London Brent oil for delivery in 2005 jumped above $40 a barrel for the first time, in what some observers say is a crucial shift in long-market expectations.
Oil dealers are today expected to react to reports quoting a senior official from South Oil, Iraq’s state-owned oil company, pledging that a key pipeline linking southern fields to offshore installations in the Gulf, would remain closed. The official said that the pipeline, which handles 1.5 million barrels of oil a day, would stay shut while the risk of terror attack remained high. The comments came a day after saboteurs attacked an oil pumping station in the south.
The soaring oil price is a key reason behind the stock market’s lacklustre performance, with the FTSE 100 mired close to its lows for the year. After the record-breaking run in crude prices, analysts are increasingly pessimistic about the outlook for the rest of 2004. Some fear that this bear market could prove worse than the 1970s slump, which is seen as the most punishing of modern economic times.
A series of City banks have revised down their FTSE 100 forecasts, with the outlook for interest rates and the lack of earnings momentum adding to the gloom. CSFB has cut its year-end forecast from 4,750 to 4,500, while Deutsche has come down from 5,000 to 4,700. Several equity houses believe that the FTSE will do well to end the year much above its current 4,369.2, particularly if the oil price remains strong.
Advertisement
“The addition of oil prices higher for longer than most had expected has been a sizeable negative factor,” Charles de Boissezon, of Deutsche Bank, said. Mike Lenhoff, chief strategist at Brewin Dolphin, who has revised down his FTSE year-end forecast from 4,750 to 4,500, said: “The oil background is something that the markets are obsessed with. They’re probably obsessing about it too much, but it’s certainly not helping.” Of particular concern is the longer-term trend in the oil price, with a growing number of analysts convinced that crude could trade at above $40 a barrel for the foreseeable future. Orrin Middleton, oil analyst at Barclays Capital, said: “For a long time people were assuming that we would revert to around $25. But now the market thinks we could stay at or around current levels for some time.”
Not all analysts think that oil will stay at current levels, saying that speculative activity has been propping up the price. Julian Jessop, of Capital Economics, said: “It would not surprise me at all if oil prices had fallen sharply by the end of the year.”
The trough of the 1970s bear market saw FTSE 100 share prices drop to 25 per cent of their peak. At its worst last year, the FTSE traded at about half of its peak levels.