Oil prices soar to almost $140 despite Saudi indications of output boost

CRUDE OIL prices yesterday jumped to a fresh high of almost $140 a barrel despite indications from Saudi Arabia that it would boost production to its highest level for more than 25 years.

The Saudi plans were overshadowed by renewed dollar weakness, prompting investors to buy commodities.

Prices also rose after an overnight fire at a North Sea platform cut the supply of high-quality oil.

West Texas Intermediate (WTI) oil futures rose to a record intraday high of $139.89 a barrel, up more than $6 from the day's low. But in volatile trading, WTI futures fell back in late trading, down $1.36 on the day at $133.49 a barrel. Brent crude was $1.65 higher at $133.50 a barrel.

The increases will place renewed pressure on airlines, which have been struggling to pass on higher oil prices to customers.

Goldman Sachs yesterday downgraded Aer Lingus and Ryanair from "buy" to "sell".

The broker significantly reduced its earnings estimates for Aer Lingus for the next three years. It said the airline was exposed to three weak economies - the Republic, the UK and the US - and was in the midst of aggressive growth, adding an extra layer of capital expenditure.

The report also noted the airline's progress on cutting costs had "been slower than expected" and said its fuel hedging was below average for European airlines, making Aer Lingus "very sensitive to changes in the oil price".

Among the risks facing the company are falling consumer demand, oil prices and Ryanair being allowed to bid for the airline.

Goldman Sachs also cut its earnings targets for Ryanair, saying its customers were "more geared towards discretionary travel and price stimulation than most".

Acknowledging that there was a time lag between a fall in consumer spending and travel, Goldman Sachs said Ryanair revenues were likely to remain strong over the summer before weakening in the autumn.

While noting that the airline seemed relatively well positioned to survive the difficulties currently facing the sector, Goldman Sachs observed that initiatives to cut costs such as grounding aircraft did not remove labour or capital costs.

For Ryanair to offset rising fuel costs - based on an average fuel cost of $120 a barrel - it would have to add €11 to each ticket, a 25 per cent rise on the average ticket price.

The Goldman Sachs report said its analysts suggested a $200-a-barrel oil price was possible by the end of the year and, at that level, all European airlines would be lossmaking.

Shares in Ryanair closed 15 cent weaker at €3.10. Aer Lingus fared better, gaining 6.5 cent to end at €1.57.

- (Additional reporting: Financial Times service)