You are here: Home - Blog -

BLOG: The trouble with oil

Written by: Darius McDermott, managing director, FundCalibre
The trouble with oil is that there are more opinions than answers. Read any investment publication and you observe as many analysts trumpeting the bottom for oil as those proclaiming that the price must tumble inexorably lower.

When opinions are as starkly contrasted towards binary outcomes, we must assume this is dangerously close to speculation.

If wisdom is asking better questions than delivering answers, I would say that investors are, at this point, better served to challenge assumptions about how the trajectory of the oil price might impact their portfolio. From there, they can decide what exposure they might seek– or if they would prefer to hedge out some of the risk.

There is also the assumption that once the price reaches the “bottom” – that so often ineffable mirage – oil will spike back up again like it did in 2008/09. However, I am not so sure about this unless we have further escalation of tensions among the Middle Eastern producers with not a little help from the US. Although, surely Obama must be under severe pressure from the frackers in North Dakota and Texas to “do something” as the majority of US job growth has been as a direct result of the shale “revolution”. But the point is, we can’t take a sharp rebound as a short-term certainty, else we are merely speculators.

It is worth also assessing outcomes. If we get the scenario, where oil does dip lower, amongst the winners should be smaller companies as they rarely have the advantage of hedging their energy costs. One area, particularly interesting in the event of a falling price, is smaller gold mining stocks where energy is a major cost of extraction. Add in to the mix an oil price that is a long way off its 2011 peak, and we start to see a compelling investment case. One Elite rated fund where investors could get access to this theme is Blackrock Gold & General.

The potential is that it could fall even lower in the short term. However, I’m a lot more optimistic about it longer term. Here I would look for exposure to the Guinness Global Energy fund.

The potential tailwind of a cheap oil price has been compared to a boost of QE stimulus. It is also a game-changer in terms of consumer spending power across the globe. This is because most consumers are affected by oil price fluctuations. Thus, a plummeting oil price is the equivalent of giving consumers a tax break. Hence, we think funds with exposure to the consumer may benefit – one such fund is Elite rated Artemis UK Special Situations.

Airline stocks have already priced in a lot of the action in recent months with the likes of Delta and Ryanair performing very strongly and one might assume this is a good way to play the oil price. However, these airlines typically hedge their AVGAS purchases so they may not immediately be net beneficiaries.

Another point is that with large parts of the global economy experiencing deflation, there is no guarantee that people will actually spend what they are saving in fuel costs. As for trying to play any rebound via ETCs (exchange traded commodities), for example, we must remember that this is not as straightforward as we might think, particularly as the oil price is not priced off spot.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Everything you need to know about being furloughed

Few people had heard of ‘furlough’ before March 2020, but the coronavirus pandemic thrust the idea of bein...

Coronavirus and your finances: what help can you get in the second lockdown?

News and updates on everything to do with coronavirus and your personal finances.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
BLOG: the impact of Eurozone volatility on investors

It’s been a major week for Eurozone policymakers: ECB chairman Mario Draghi finally delivered quantitative easing in the middle of...