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Oil Prices Rise: What Happens Next?

Published: February 24, 2012 | 12:02 pm
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Analysts are divided on the immediate future for oil prices after recent rises, but caution that emerging markets and energy stocks could be affected.

Prices have been driven higher because of renewed concerns about Iran’s political situation and sanctions imposed on Iran oil by Western governments.

At the same time, concerns about the Western economies – particularly Europe – could dampen the cost of oil. [ LCOCV1 123.72 0.10 (+0.08%) ]
“Even if everyone loves each other, oil prices have very little downside potential. The market doesn’t have enough supply and we are running quite tight,” Johannes Benigni, Managing Director, JBC Energy, told CNBC.

“Right now, we could afford (to be without Iranian oil) – in the third or fourth quarter we can’t afford it without Iranian oil,” he said.

He believes that the amount Iran produces will decline independently from the sanctions as the country loses production capacity.

Oil-poor emerging market countries tend to suffer most from high oil prices, as the costs of the oil they need to fuel economic expansion rises.

While energy stocks often get a boost from rising oil prices, this is unlikely to happen this time round, according to Jens Zimmerman, Equity Analyst, ABN AMRO Private Banking.

“Because of the risk of high price volatility with Iran on the upside and Greece on the downside this is not an environment where the energy sector overall could outperform the broader market. As soon as oil price volatility increases, the earnings visibility decreases, and then investors get concerned and exit,” he told CNBC.

He added that the risk-on environment since the start of the year, which should be favorable for energy stocks, had not been great for those stocks, a clear indication that investors are not comfortable getting back in.

“We tell our clients to stay defensive. We still prefer integrated oils, because as soon as risk aversion returns they will be the favourites,” he added.

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