Financial Market

Oil this week traded at the $100 barrel barrier for the first time on Wednesday, marking an important market milestone.

Spurred on by recent unrest in Nigeria, Algeria and Pakistan, coupled with a weakening US dollar and cold weather warnings, the record high price of oil is wake up call of things to come in the New Year.

On Wednesday it was light sweet crude rose $4.02 to $100 a barrel in New York, prompting a drop in shares and a surge in gold prices.

On the back of the price rises the UK saw record petrol prices at the pumps at an average high of 103.3p, beating the previous high of 102.92p set on Boxing Day.

After Wednesdays $100 high, oil prices did ease today dipping to 99.61 dollars per barrel.

The oil high comes at a time when many central banks are trying to cut interest rates in order to stimulate growth, and with this new high there are increasing concerns that rising oil prices will stoke inflation. Increased inflation brought about by increasing oil prices will result in central banks being unable to make the necessary rate cuts to boost flagging economies, bringing the threat of recession closer.

Market experts have said that continuing demand for oil without an increased supply will only see this price increase further adding to the woes of oil producing economies.

The oil-producers’ cartel OPEC has blamed speculators for the high price of crude, stating that there is plenty of the fuel in the market to meet the demand of consumers.

Oil traders are due to meet OPEC in Vienna on February 1st, but after rejecting proposals for any increase in production in December blaming rising oil prices on industry speculators, any rise in production looks an unlikely solution.

Although unrest in oil producing countries is certainly playing a significant role in the rising cost of oil, some market analysts have also identified increasing demand from China and India as a significant factor.

Oil prices however also continue to get support from a weakening dollar, and additional fears remain ahead of the US Department of Energy’s weekly report on energy stockpiles due today. If the report confirms a seventh consecutive weekly fall in crude oil reserves, oil prices could well break Wednesdays $100 per barrel high.

Last week ending December 21, the US Department of Energy reported crude oil fell 3.3 million to 293.6 million barrels of reserve crude oil, a sixth consecutive fall.

Over the past five years crude prices have quadrupled, and after staving of the $100 per barrel mark in 2007, experts are already predicting a $120 per barrel high in 2008 and news of further falling stock piles later toady will certainly send prices closer to this figure.

The price of gold passed a 28 year high of 850 dollars an ounce today following unrest in Pakistan and political turmoil in Kenya fuelled demand for the precious metal.

The current price of gold which hit $866.53 on the London Bullion Market, which although in part been contributed towards by the declining dollar which fell against the Euro again today, is as a result of demand brought on by safe haven buying.

The relationship between political unrest and an increased interest in gold is nothing new, and in troubled times gold is often seen as a safe haven for protecting investment funds from the impacts of inflation seen with stock and share investments.

Historically gold has not seen the rises of in 2007 (up 30%) since 1979, when the Iranian revolution crippled crude oil exports and US inflation hit 13%.

The rises in gold have come as record oil prices have been gradually driving up inflation, and supplies from South Africa, the world’s biggest producer, have dropped to the lowest in 84 years.

The demand for the metal has also has arisen due to heavy losses in credit markets which have spurred demand for alternatives to stocks and bonds. With the dollars drop investor interest in dollar-priced commodities is growing as they become cheaper for buyers using stronger currencies.

“Investors are worried about the oil prices and the weak dollar. When the situation is unstable, they invest their money elsewhere and this has boosted buying interest in gold” - Gary Yue, a gold dealer at Delta Asia Financial Group.

Also a factor in the rise of the price of gold, according to the World Gold Council, is the increased volume of jewellery purchases in emerging economic powerhouses China and India.

Gold is tipped to continue to increase in value over the coming months. Amongst the aforementioned reasons for the precious metals popularity, it believed many investors will continue to look at gold as a way of protecting reserve funds from acceleration inflation.

In the first business post written for Financial Market, we highlight the recommendation made today by the United Kingdoms Competition Commission ordering British Sky Broadcasting to sell a significant proportion of it shares in competitor ITV PLC. Under the recommendations BSkyB must reduce its share stake from the 17.9% it currently owns to below 7.5%.

The recommendation by the Competition Commission will now go to the Secretary of State for Business, Enterprise and Regulatory Reform who has until the 29th of January to reach a conclusion.

As well as the share reduction the Competition Commission also pushed for pledges that BSkyB would not push for a seat on ITV’s board, but didn’t go as far to recommend that BSkyB sell its entire stake in its competitor.

As ITV’s single biggest stakeholder, claims have been made that by having such a large stake in the company it restricts competition and isn’t in the public interest. It was thought that BSkyB could also influence ITV strategy after it acquired the £940 million stake in November last year, and was seen as an attempt to thwart a potential take over by NTL. NTL latter pulled out of takeover talks and BSkyB’s moves were heavily criticised by rivals BBC and Channel 4.

BSkyB had suggested it transfer its voting rights into a trust but the Competition Commission deemed this would be too difficult to enforce.

Analysts have said that although BSkyB will loose a significant sum if forced to sell of its shares, the company has still succeeded in preventing a takeover of the free to air broadcaster.

At current share prices the sell off could cost BSkyB around £200 million as the value of ITV’s shares have dropped since it bought its stake in the company. BSkyB paid a 17% premium when it first invested with what it called a ‘long term investment plan’, and shares at 0900 GMT were trading at 84 pence, far off the 135p a share it paid.

Graph showing ITV shares over the last 2 years -Source www.lse.co.ukBSkyB is itself owned 39% owned by a subsidiary of Rupert Murdoch’s News Corp.

Toady on the 13th December 2007 a joint plan has welcomed by global financial markets that involves a $20 billion cash injection from a consortium of five world central banks to stave of the growing likelihood of US recession and ease the credit crunch in other financial markets.

The cash injection will be made available in the form of ten of billions of dollars of short terms loans to banks, aimed at lowering inter-bank lending rates. The program called a “term-auction facility” will be available alongside additional expanded lending facilities available from the Canadian and European Central Banks.

The move was welcomed by Banks who reacted negatively to what they called a timid quarter point cut on Tuesday 11th December. On news of the new lending schemes being released U.S. stocks began to show signs of recovery, after late drops on Tuesday following the cut by the FED.

“News that global central banks are pledging liquidity was a positive for the market early in the trading day, but, upon further reflection, some might be pondering if it’s really a solution, or further evidence of just how deeply embedded the problems in the financial system have become,” said Frederic Ruffy, analyst at Optionetics.

News of co-ordinated action with Europe’s top banks demonstrates that the FED is taking additional steps, after lowering the federal funds rate on Tuesday did not accomplish enough in terms of unclogging credit markets.

The main problem in credit markets has not been that rates were too high, but that financial institutions have been unwilling to lend after subprime mortgages and other securities had been badly mispriced. The added liquidity that the “term-auction facility” should provide should relieve some of that pressure on financial institutions.

Through this action the Fed is actively forcing liquidity into financial markets, rather than having banks demand it. This extra liquidity will be supplied at whatever price the market deems, rather than setting an interest rate first and letting the amount of the loans be determined by demand from banks.

As part of the plans there are also procedures in place to protect any bank accesses the funds, and so will remain anonymous. The aim here is avoiding any stigma a bank may receive regarding mis-managed liquidity property.