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Bad news for drivers but opportunities for investors as oil price gushes higher

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Written by: Paloma Kubiak
18/05/2018
Pump prices have hit a three year high as the cost of oil has broken through the $80 a barrel mark, but for investors, the rise could present some slick opportunities.

The cost of oil hit $80 a barrel yesterday for the first time since November 2014.

As such, petrol and diesel pump prices have hit a three and a half year high and are expected to climb 2p a litre in the next fortnight, according to the RAC.

It noted that yesterday, petrol prices went up to 126.62p a litre while diesel stood higher still at 129.41p.

This recent rise makes it £8 more expensive to fill up a 55-litre family car; £22 a tank more expensive for unleaded compared to prices in 2016 and £24 more for diesel.

All in all, motorists are paying 25p a litre more than at the start of 2016 when oil crashed to $26 a barrel when the average price of both fuels stood at around 101p.

Oil price could rise to $100 a barrel

An oil chief has speculated that the barrel price could rise to $100, a price last seen in August 2014.

Since July 2016, the price has risen by $30 a barrel and has consistently traded above $50 for at least two years as a result of OPEC (the Organisation of Petroleum Exporting Countries) and Russia limiting production to reduce an over-supplied market.

Further, with the United States’ decision to re-impose economic sanctions on Iran (the third biggest oil producer in OPEC), oil prices are likely to head higher as supply tightens.

RAC fuel spokesman Simon Williams, says: “Sadly for motorists, the worst may be still yet to come. If the price of oil goes up towards $100 a barrel we will very likely see a return to the dark days of April 2012 when petrol and diesel hit record highs. Even though the oil price was higher then (around $120 a barrel) today’s weaker exchange rate will lead to similar prices at the pumps.

“This will inevitably force families to make some tough choices about how they spend their money.”

Five ways investors can play the oil price rally

The oil price rise may be bad news for motorists, but for investors, there may be ways to profit from the recovery.

Russ Mould, investment director at AJ Bell, lists five ways to potentially gain from oil:

  • Dedicated energy equity fund

Guinness Global Energy is an example of an actively-managed fund which specialises in investing in firms related to the energy industry, oil and oil equipment and services stocks.

Just under half of its assets are in US-listed stocks with 15% in Canada and just under 8% in the UK. The largest individual stocks positions include Canadian oil sands specialist Suncor, America’s Occidental Petroleum and Imperial Oil, an integrated (upstream and downstream) Canadian firm in which ExxonMobil has a near-70% stake.

  • UK equity tracker fund

The iShares Core FTSE 100 exchange-traded fund is big (£5.9bn in assets), cheap (0.07% total expense ratio) and has both BP and Shell in its top-five holdings list, with an overall weighting toward energy of 17.3%, although it is by no means a pure play. 

  • Actively managed UK equity fund

One fund which already has big holdings in both BP and Shell is River & Mercantile UK Equity Income. They are the two single biggest holdings in the £299m collective, which comes with a 15% weighting toward energy, a 3.7% dividend yield and a 0.90% ongoing charge.

  • Oil tracker

Investors may want to avoid stock specific risk and just follow the oil price. ETFS Commodity Securities ETFS WTI Crude Oil tracks the US benchmark, West Texas Intermediate, and ETFS Commodity Securities ETFS Brent Crude the equivalent European oil benchmark. Both trackers follow a basket of oil futures prices, not the spot price, and both use synthetic replication (derivatives) to achieve this. Besides movements in the oil futures, investors are also exposed to the roll yield and collateral yield for their total return on investment.

  • Oil stocks and oil-related stocks

Oil stocks are starting to warm to the rise in crude prices but they have still lagged the rise in the commodity’s price, as if to suggest investors do not believe the gains will last.

The FTSE All-Share Oil & Gas Producers sector has gained 10% in 2018 while the Oil Equipment & Services sector is up by 13.9%, to place it fifth in the performance rankings.

The FTSE All-Share Oil & Gas Producers index trades at a multi-year low relative to the oil price (a calculation achieved by simply dividing the index’s value by the oil price). It currently trades at 126 times the actual oil price, compared to an average of 155 over the last 20 years.

BP and Shell are the biggest members of the sector index and they will generally respond favourably to the higher oil price as the higher crude goes, the safer their fat dividend yields become. Based on an unchanged dividend per share of $0.40 from BP and $1.88 from Shell (and a sterling-dollar exchange rate of $1.34) BP currently offers a 2018 dividend yield of 5.1% and Shell 5%.

Less well developed, pure play producers like FTSE 250 firms Cairn and Tullow could also benefit, but the operational and exploration risks are higher here.

Then the riskiest oil plays are the AIM-quoted junior explorers which may not even be producing or have a find, but whose share prices could welcome more positive sentiment toward their industry.

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