Recovery Strengthens

24 April 2008

The price of oil slid gently back to and below US$ 60 per barrel in September and early October, and this gave stock markets a major lift. What grabbed the headlines of course was the Dow Jones Index's climb to an all-time high of 11,921 points on October 6th, eclipsing the previous record of 11,908, which it hit way back in January 2000.

Needless to say, the world was a different place in 2000. The driving force behind stock prices in those pre-9/11 days were and telecoms shares, which subsequently collapsed in spectacular style. The markets have also endured the Enron and WorldCom scandals of 2001 and 2002 in the intervening period.

The other thing that has changed is, of course, the oil price. You could buy a barrel of black gold for less than US$ 30 throughout 2000, and memories of the sub US$ 20 barrel were still fresh. But demand has risen sharply since then. According to BP's Statistical Review of World Energy, global oil consumption was 82.5 million barrels last year - 9% higher than the 75.7 million barrels of 2000.

This illustrates the influence that the high oil price is having in holding back share prices. The current upswing is being driven by solid profitability (rather than the hot air of the era) and, on that basis, one would expect share prices to be significantly higher than they are. The high cost of energy, however, is clearly acting as a brake.

And the prospect of oil at US$ 30 a barrel is certainly a very distant prospect. For one thing, the Organization of Petroleum Exporting Countries (OPEC) cartel has agreed to cut production for the first time since 2004 in a bid to stabilize prices around US$ 60.


Despite the looming shadow of persistently high oil prices shares are performing well. Although, unlike the Dow, it is a long way off record levels, the ACT Heavy Equipment Index (HEI) enjoyed steady gains in the latter part of the summer. By early October it was back up to 132 points, it's highest since mid-July and a time when it was yet to bottom-out.

So equipment manufacturers shares seem to have entered a period of recovery, albeit a gentle one. Share prices are much less volatile than they were during the enormous rally that started a year ago and peaked this May.

The technical indicators that were discussed in detail last month seem to point to a strengthening trend, with a little more price stability than was seen earlier in the summer. It still remains to be seen, however, whether the HEI will show a definite movement - either higher or lower - or whether it will simply move sideways, oscillating between its recent high of 132 points and low around 121.


Receive the information you need when you need it through our world-leading magazines, newsletters and daily briefings.

Sign up