Oil prices are rising and can add fuel to your funds

Rising oil price – a sign the global economy is emerging from the pandemic – can add fuel to your funds

Trade-off: Petrol prices also go up

Oil prices are rising. In the last few days, Brent crude, the global oil benchmark, rose to nearly $73 a barrel – its highest price since May 2019. This is a sign the global economy is emerging from the pandemic. In March last year, the price of oil plunged to below $20 a barrel as the global economy spluttered. 

While any signs of economic revitalisation are welcome, a strong oil price is not good news for consumers and those officials at the Bank of England who watch over the economy. 

Higher oil prices feed through into the wider economy, pushing up petrol and energy prices and the cost of household goods. These in turn fuel inflation and put pressure on the Bank of England to push up interest rates. 

Experts at the Centre for Economics and Business Research predict that inflation could jump from 1.6 per cent to 3.8 per cent by the end of next year with the Bank base rate increasing from 0.1 per cent to two per cent. 

Higher oil prices and any indication of a pick-up in inflation tend to give the UK stock market the jitters. 

Yet there is one part of the equity market that is more comfortable about a strong oil price – and that is the FTSE 350 oil and gas sector. Comprising giants such as BP and Shell, as well as the likes of Tullow Oil and Premier Oil, this subset of the index has bounced back in recent months. 

Russ Mould, investment manager at wealth manager AJ Bell, says the oil and gas sector has risen in value by 43 per cent since ‘Pfizer Monday’ last November when the US pharmaceutical giant confirmed it had developed the world’s first effective Covid-19 vaccine. Only four of the 40 industry groupings that make up the FTSE 350 have performed better. 

Yet this figure, says Mould, needs to be put into perspective. Oil and gas is the second worst performing sector over the past ten years, down 38 per cent. It is the fourth worst over five years – down 23 per cent – and the second worst over the past year. 

Mould explains: ‘This poor performance is down to numerous factors, including oil price volatility, increased supply [largely due to US shale gas production] and the recent hit to demand caused by the pandemic. 

‘There are also long-term doubts over the future of oil and gas, thanks to political and public pressure for a switch away from hydrocarbons to renewable sources of energy.’ 

He adds: ‘Throw in the rise of investment funds which filter stocks by environmental, social and governance issues and routinely avoid oil companies, challenges in the courts over the slow speed at which some oil companies are moving towards zero carbon – and you can paint a pretty bleak future for oil and gas stocks.’ 

But Mould says the strong oil price, together with Shell’s decision to tickle up its dividend payment for the first quarter of the year, have improved the mood music. Will Riley is co-manager of Guinness Global Energy, a fund that invests in companies engaged in the production and distribution of energy. 

He believes that if the oil price remains at between $60 and $70 a barrel for the foreseeable future, the fund has the armoury to outperform world stock markets (the MSCI World Equity Index). Riley believes the upside for fund investors is between ’35 and 40 per cent’. 

He says: ‘Demand for oil is recovering, but the key change is that the Organisation of the Petroleum Exporting Countries [OPEC] is back in charge of dictating the price. The supply of oil from non-OPEC producers such as Canada and Brazil is constrained – more so than pre-Covid. As for US shale gas companies, shareholders are increasingly demanding to see returns in the form of dividends rather than money being used to expand production.’ 

Although most UK investors traditionally get their oil and gas exposure through FTSE 100 giants BP and Shell, Riley says such a stock-focused approach carries risk. This was highlighted by the disastrous BP Deep Water oil spill in the Gulf of Mexico in 2010 that caused the company’s share price to halve in 40 days.

Guinness’s approach is to have 30 equal company holdings with the portfolio rebalanced on a regular basis. As well as BP and Shell, it has stakes in international companies including US oil and gas producer Exxon, Canadian-listed Suncor Energy and energy technology company Schlumberger. 

Investment funds that have big positions in energy stocks include ASI UK High Income, Allianz UK Opportunities, Artemis SmartGarp UK, Schroder Recovery and Man GLG Undervalued Assets. 

Ben Yearsley, investment director at Plymouth-based adviser Shore Financial Planning, likes fund Schroder Global Energy. But he is also a fan of both Shell and BP. 

He adds: ‘They both have sufficient cash flow to invest in the green clean energy of the future. Orsted used to be Danish Oil and Natural Gas before transforming into the world’s biggest renewable wind generating company. Who’s to say Shell and BP couldn’t do the same? I’d buy both stocks.’

Read more at DailyMail.co.uk