Quoting French ministers, newswires such as Bloomberg and Reuters have reported that France is in talks with the US and Britain on a possible release of strategic oil reserves to push fuel prices lower. This is hardly a surprise considering that oil consuming markets have been bemoaning the continued rise in energy prices. Of note is the fact that 2012 will be an election year for both the US and France, and politicians may have to placate voters’ concerns about rising fuel prices.
But coordinated action is required
Oil reserve releases are usually coordinated by the International Energy Agency (IEA), and currently there are obstacles to such a concerted effort as
1) the head of IEA has questioned the need for a coordinated IEA release, and
2) support also has to be garnered from oil producing countries as it is possible that they may reduce production.
Merely a stopgap measure
Even if most of the international community does agree to cooperate, the issue of geopolitical tension in the Middle East has to be resolved. The flood of liquidity by central banks will also support prices of scarce resources such as
oil. Stripping out effects of inflation, oil prices are still set to rise over the longer term, due to the fundamental reason that the era of easy oil is over. Many existing oil fields are in decline, and new discoveries are mainly in places where resources are difficult to extract, be it in physical, economic or political terms.
Positive outlook for oil and gas industry
Hence, as much as share prices of oil and gas related stocks are correlated to movements in oil price, we are not overly concerned with this latest piece of news, unless a more fundamental driver (e.g. low fuel demand due to deterioration in economic health in major consuming countries) emerges. Meanwhile, we maintain our Overweight rating on the broader sector, with Keppel Corporation [BUY, FV: S$12.27], STX OSV [BUY, FV: S$2.25] and Ezion Holdings [BUY, FV: S$1.05] as our preferred picks.
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