AFRICA: Just not enough oil to go around

AFRICA: Just not enough oil to go around
Another year, another record oil price. The immediate reasons why the price of a barrel of oil jumped $4 to $100 yesterday were a cold snap in North America and unrest in two important producing nations: Nigeria and Algeria. Beneath the surface, however, the key fact about oil has not changed, and it is an uncomfortable fact: there is not enough being produced. Or, more precisely, there is not enough spare capacity in places such as Saudi Arabia to prevent regular price spikes. It is why $100 oil no longer looks like an aberration, but the norm for a while yet.

The seeds were sown in the 1990s when the price fell to $10 and oil majors, and state-owned producers, did what all hard-pressed organisations do - they cut back on investment, which meant everything from oil rigs to refineries. The result is that the industry finds itself running at full speed to meet the surge in demand from India and China.

In the end, high prices of any commodity stimulate greater exploration and, eventually, greater production. But oil is an exercise in heavy engineering as it can take a decade to bring a major field from discovery to production.

The International Energy Agency warned last year of a "crunch" in supplies in five years' time. Unless we have serious global recession to stifle demand, that forecast may turn out to be conservative in its timing.

A question of timing
It is easy to think of reasons why Banco Santander should not buy Alliance & Leicester, and Credit Suisse's analysts in Madrid listed a few yesterday.

There's the fact that Santander's mortgage book is already larger in Britain than in Spain. Bulking up on UK mortgages, at this wobbly moment for the UK housing market, is not obviously progress for a bank that supposedly scans the globe for opportunities.

Nor has Santander demonstrably created value from its acquisition of Abbey National four years ago. The challenge for Santander is to sell a wider range of financial products in the UK. A&L would bring a few business customers, but not so many that Santander could claim true diversification.

So why were the Spanish interested in A&L last month? And why did its chairman, Emilio Botín, in effect, reveal the fact via an interview in the FT?
The short answer is opportunism. Any deal of questionable logic can be made to make sense if the price is right. A month ago, it was possible to believe that A&L shareholders, fearful of what the credit crunch might bring, might bludgeon their board into accepting a knockdown price.

So why not let those investors know what was going on?
Fair enough, but A&L is now singing its confidence from the rafters. It has negotiated a credit line and can boast that its financing is secure until the third quarter of this year. The autumn is not a lifetime away but it is sufficiently distant for A&L to keep alive the idea that throwing itself at the first would-be suitor would be an act of cowardice.

What could change?
Well, Santander could return with a better price. Indeed, at Abbey National, it took a few tentative jabs before throwing a proper punch. Ultimately, though, it may require A&L to believe its options have narrowed. For that to happen, financing conditions for second-line banks would have to deteriorate further. That is possible, but A&L's board can fairly argue that the time for selling is not now, or at least not at the current price.

Wonder lost?
Few retailers' Christmas trading figures will be anticipated as eagerly as that of Woolworths. For a warm-up, Credit Suisse halved its target for the shares yesterday to 11.5p, a fraction below the market price. It was a reminder of how low Woolies has sunk. A couple of years ago, the private equity group Apax was sniffing around when the price was 56p. Now Woolies is valued at £180m - little more than more than three weeks' sales.

The reasons for the decline are well-known: supermarkets, Argos and the internet are squeezing margins. Some analysts reckon the high-street chain is essentially worthless, and that the only value resides in the distribution business, which supplies CDs and books to the likes of Sainsbury's and Asda.

Woolies' management is admired but it hasn't offered a vision beyond running a tighter ship, which is a thankless task when the biggest problem is too many stores. Citi's analysts reckon the chain has delivered lower like-for-like sales in seven of the past eight years. We will discover on the 16th whether it will buck that trend, but the share price is saying it's now or never for Woolies.

By Nils Pratley | Read more | Digg story

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