As stock markets both at home and abroad climb ever higher one of the areas which has been left behind is the resources sector. This sector consists of a range of companies from the integrated oil majors such as BP and Royal Dutch/Shell to the much smaller oil and mineral exploration companies such as Tullow and Ivernia West.
The overriding factor which has caused weakness in share prices has been substantial declines in the prices of oil and other commodities over the past year.
After staying in an $18 to $20 (£13-£14.39) per barrel price range throughout most of 1997 the oil price slumped sharply towards year end and has recently traded below $14 per barrel. Over supply, combined with a decline in demand due to the Asian crisis, caused this sharp decline.
OPEC and other producers have recently agreed to curb production and this has led to some recovery in the oil price. Industry specialists are now expecting the oil price to average $16 per barrel for 1998.
The table shows the share price performance of a selected number of integrated oil majors together with a number of exploration companies.
Although the share prices of some of the larger oil companies have risen so far this year, these rises are still far short of gains in the overall market indices. Not surprisingly, it is the more narrowly focused pure exploration and production companies which have shown the largest declines.
Favourites in the Irish market such as Tullow and Dana have shown no net change in price so far this year. While this will disappoint the bulls of these stocks, they have held up relatively well compared with Premier Oil, Cairn Energy and Ivernia whose prices have declined substantially.
The outlook for commodity prices in general is the single most important factor for these companies taken as a group. Clearly, for the oil companies, it is trends in the oil price which is of critical importance. Assessing trends in these commodity markets is notoriously difficult given that the producers of commodities generally try to exert some influence on the price through controlling supply.
OPEC is the prime example of a suppliers' cartel. It was once all-powerful and was capable of holding the world to ransom. Now it is a pale shadow of its former self given that members of OPEC now only supply approximately 36 per cent of the world's oil needs. However, when oil prices are falling sharply OPEC is still capable of reducing supply by a sufficient margin to influence the price of oil.
With the oil price as low as $12 per barrel earlier this year, OPEC could agree on quota reductions among its members. It also secured agreement from some non-OPEC members such as Mexico to control their supply. This OPEC meeting held in Vienna in March was a clear success and has injected stability back into oil prices.
However, over the medium term the oil demand-supply situation remains finely balanced given that supply from Iraq is liable to increase. Nevertheless, from an investment viewpoint as long as there is not a precipitate collapse in oil prices, there could well be attractive investment opportunities at current share price levels.
Of course issues relating to each individual company will far outweigh any overall factors in determining share price performance. This is particularly the case for the smaller exploration companies where a favourable announcement on an exploration well can have a dramatically positive impact on the share price. Conversely, disappointing news can have an equally dramatic adverse impact.
For investors who feel that now is a good time to invest in a sector which has lagged the overall market, investing in one of the majors together with some of the exploration companies could prove rewarding over the mediumterm. British Petroleum or Shell can provide a solid anchor to such a portfolio while investment in some of the volatile exploration companies could result in substantial upside.
