High Crude Oil and Energy Prices

High Crude Oil and Energy Prices

Trading Features / Strategies from Simon Denham of Capital Spreads.

With Crude Oil showing no signs of wishing to fall back to a more reasonable level investors must now be wondering what the effect of increased energy bills will be on bottom line numbers. It is easy to criticise companies for not taking adequate hedging risk against rising costs but in all truth not many would have been speculating on petrol moving from around 97p/litre to almost 120p in just a few short months. And, in any case, hedging forward fuel costs can only do so much (at some point you must pay the new level).

Airlines are the obvious first casualty (as we have seen by the ‘sudden’ willingness of old bitter enemies to actually finally agree to some consolidation) as fuel costs are such a major factor in total costs but with power getting ever more expensive virtually every sector’s profit margins must now be viewed as ‘at risk’.

The flow through of increased input prices to consumer inflation will be resisted, especially by the high street, in the name of maintaining market share and sales but unfortunately there is precious little in the way of corporate fat reserves these days to be used in times of famine. In the past I have been quite sanguine as to the impact of these one off hikes in the cost of commodities to the overall CPI numbers as the ‘raw material’ component of any product has always been much lower than is commonly thought. Unfortunately these factors are rearing their head just as the overall economic situation is moving into neutral (if not reverse) and this means that the ability for companies to absorb the new price levels within increased sales is very much reduced.

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I do not have much idea as to what the overall cost of petrol, heating, energy etc is on the average household income will be but with recent mortgage hikes, council tax hikes. National Insurance hikes, basic food cost hikes the outlook cannot exactly be considered good for disposable income levels or saving ratios. The fact that a fridge (which I buy about once every ten years) might be cheaper than last time seems only small comfort.

Combined with this immediate brake on the economy is the other more long term worry which is likely to become of increasing political importance for decades to come.

One of the major problems, from the view point of the UK, is that although most people are doing OK at the moment (no matter how bleak the situation painted by certain newspapers) and are having to tighten their belts just a notch or so the fact is that, even to the most optimistic, the future looks very grim indeed. And I do not mean the current little economic situation.

People are finally waking up to the fact that the last ten years of ‘prudent, laying down of solid economic fundamentals’ has in fact, been the exact opposite. One of the major things that keeps the fabric of society together has been the knowledge that you are working towards a reasonably comfortable well funded retirement. In ten years the UK has gone from a century’s worth of pension surplus to a situation of massive shortage. Retirement is no longer ’65 (or whatever) and out’ but is in danger of becoming ‘work until you drop’ a sad return to the poorhouse mentality. It is quite stunning to realise that the man responsible for this situation is now our Prime Minister. His “rob Peter tomorrow” to “pay Paul today” policies to effectively keep the feel good factor going for as a long as possible seem to have been solely designed to keep himself and his cronies in a job. By conning the majority of the electorate that things were going wonderfully and that the knocking on the door was not the bailiff but a representative of Camelot grasping the winning lottery ticket we are now set on a track of tight suits hair shirts for many years to come (no matter who is in power). ‘Our Gordon’ stating things like ‘listening to the electorate’, ‘address the fears of the voters’ are code for ‘I haven’t a clue what to do, but it sounds good on TV’.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.

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'High Crude Oil and Energy Prices' edited by SD, updated 06-May-08

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