Oil price could hit $147 a barrel as unrest continues

The unrest in the world’s most important region for oil supply is certain to push prices higher.

The 'Arab Spring' appears to be gaining strength across the Middle East.

Syria is following Libya’s footsteps, engaging in a bloody civil conflict that will not be easy to resolve. Iran, next door, is becoming increasingly aggressive towards the developed world, now refusing to supply oil to Europe, including the UK.

As a result, oil prices are rising, with Brent above $120 and the storage-constrained WTI above $100/barrel.

Should military action be sparked in Iran it is not inconceivable that we may revisit the all-time highs of $147/barrel set in July 2008.

Saudi Arabia has stated that it needs oil prices to stay above $100/barrel to finance its social programmes designed to suppress militancy, so it seems unlikely that the country would increase production significantly should prices spiral again.

In this environment, oil-producing companies are enjoying a healthy growth in profits. Smaller companies controlling reserves and development-stage projects are being re-rated after the sell-off in 2011.

It is not surprising that corporate activity is accelerating. Larger, cash-rich oil companies are seeking to capitalise on low stock market valuations; these levels make it cheaper to buy listed companies controlling reserves than to invest in the development of individual projects.

The most recent announcement by Dragon Oil (DGO) that it is in discussions to acquire Bowleven (BLVN), a significant holding in the Junior Oils Trust portfolio, vindicates our positioning for recovery in the sector, buoyed by M&A activity.

We believe that smaller oil companies offer particularly good value in this environment and are likely to outperform their larger peers.

By Angelos Damaskos, chief executive officer of Sector Investment Managers and fund adviser to Junior Oils Trust