Investing in energy or the oil markets used to be relatively straightforward, based mainly on analysis of supply and demand.Now investors have to grapple with a range of factors from emerging markets to resource nationalism and private equity, according to research from UK fund manager Standard Life Investments.
Standard Life points, for example, to the rise of energy companies from emerging markets, including Russia, China and Brazil, that has changed the balance of power in the oil sector.
"Gazprom and Petrobras all feature in today's top ten firms measured by market capitalisation."
In previous periods of high oil prices, producers invested oil revenues mainly in U.S. dollar-denominated instruments, such as U.S. government bonds.
Now oil producers are at a stage of development where they have more options available, including investing in domestic infrastructure or buying overseas assets, Standard Life said.
"For instance, private equity, real estate and public equity feature heavily in the portfolios of the Abu Dhabi, Kuwait and Qatar investment authorities," it said.
Dubai International Capital now owns assets in the UK, for example, ranging from Tussauds to the Travelodge hotel chain. It is selling Tussauds to the Blackstone Group.
They are also spending on infrastructure and developing their own stock markets.
But investors can't get exposure to the Middle East oil producers via local stock markets because of restrictions and lack of liquidity, said Frances Hudson, investment director for strategy at Standard Life Investments.
"So perhaps you could look, for example, at investment companies that sell services to the Dubai property market, or private equity funds that invest in the Middle East."
Private equity investment is currently very healthy in the Middle East, a region that previously mainly served as a source of funds for private equity.
In the corporate sector in energy, Standard Life sees a trend that favours specialist oil service companies over the global oil majors. Oil producers in the Middle East, for example, have less need now for international oil companies as partners.
"Some investors prefer to play the sector via the solutions and service companies," said Hudson. "These sub-sectors, such as oil equipment and services, have performed better than the integrated companies."
She pointed to Russia and the Middle East as producers still needing to buy in such expertise.
(Reuters, 16/05/2007)