The best ways to profit from a low or recovering oil price
While the low oil price appears to offer the patient investor an opportunity if they are banking on recovery, there are certainly risks that investors need to heed in the short-term.
Yourmoney.com shares investment analysts’ views on how to profit from both a low oil price and from a recovery in the oil price.
Heather Ferguson, investment analyst at Hargreaves Lansdown, says investing in individual shares often poses a higher risk, whereas funds provide a broader, more diversified way to benefit.
To profit from a low oil price, Ferguson suggests the Lindsell Train Global Equity fund as it is heavily exposed to the global consumer who have benefited more from the fall in the oil price than almost any other area.
She also picks the Schroder Tokyo fund as a good option in light of the Fukushima disaster which means that Japan now imports the majority of its energy and has therefore benefitted from the fall in the oil price.
“The darkest hour is before the dawn and for investors banking on a recovery in the oil price, there are several options.” She says that specialist oil funds and individual stocks are far too risky as other factors can affect company performance.
The Artemis Global Energy fund could be an attractive proposition for those with a head for heights as its prospects are very closely aligned to those of oil producers. She lists the iShares Oil & Gas Exploration & Production ETF as a passive option as it invests in almost 100 oil exploration companies globally.
Finally for a more balanced approach, Ferguson opts for the passive Legal & General UK 100 Index Trust. In contrast, an actively managed approach allows the investor to leave the decision-making to the expert and the Liontrust Special Situations fund which is run by a manager with a strong stock picking record is a good option, says Ferguson.
Adrian Lowcock, head of investing at AXA wealth, is taking a long-term view beyond 2016, even as far as 2026 by investing in oil. If oil is $30 a barrel now and if it returns to $60 a barrel beyond this year, investors could see their money double. Though it does mean that in the short-term, investors need to ride out the volatility as there are murmurings oil prices could fall to $10 a barrel.
He urges other investors to be cautious and patient too. “The market is still trying to work out where the bottom of the oil price will be and oil is likely to remain under pressure for a while.”
However he does expect the oil price to begin to recover later in the year, although investors should expect dividend cuts, profit warnings and bankruptcy to impact the energy sector for longer.
As both opportunity and risk are present, the best way to access energy stocks is through an active fund, says Lowcock.
He picks JPM Natural Resources as manager Neil Gregson invests in a mix of precious, energy and base metals such as nickel – usually around a third in each although this can vary.
“His focus is on long-term investments and he meets company management and field trips to understand the company’s prospects.” Lowcocks adds the fund tends to be more invested in smaller companies and is currently underweight in oil stocks, but it can increase its exposure when an opportunity arises.
For investors wanting direct exposure to oil, Lowcock says investors are best using an exchange traded commodity such as ETFS Commodity Securities WTI Oil. It provides exposure to US West Texas Intermediaries oil. “Investing directly into commodities can be risky and prices can be very volatile so investors should monitor it closely and only consider this if they are happy to take the risk”, Lowcock adds.