Price of crude expected to drop

War fever has kept the price of crude bubbling at historic highs of about $30 per barrel, but oil company shares generally have fallen in line with the bear market.

Critics of the pending war in Iraq have seen the seizing of Middle East oil as a vital goal which partly explains why George Bush has been so determined to invade.

If so, the ensuing bonanza for western oil firms has completely escaped the minds of investors who have fed no premium into equity values.

Iraq has 112bn barrels of recoverable reserves and could quadruple its output to 8m barrels a day within six years, the Centre for Global Energy Studies believes. Such a glut of supply at a time when demand is growing slowly would send the price of crude plummeting and damage western company interests.

Many experts believe that oil prices could fall to $20 once the war in Iraq is over and this is the main reason why oil shares have been relatively depressed while earnings have remained strong.

There have been odd exceptions such as Paladin Resources which is poised to enter the FTSE 250 after its shares soared 70% through a series of well timed takeovers.

Roy Franklin, chief executive of the exploration and production group which yesterday reported annual pre-tax profits up 75% to £66m, said he had hedged half of the group's output at $24 for 2003 and up to 30% of it at $22 for 2004 to mitigate the impact of any crude price collapse.