Oil’s a wild ride for investors. Do you feel lucky?
The oil price has been on a roller-coaster ride over the past two years, with the global economy sitting right next to it.
It has been a bumpy ride for investors, who have been thrown around by unpredictable twists and turns.
When a barrel of Brent crude hit US$115 in July 2014, nobody was seriously predicting it would subsequently collapse.
And when it plunged to a low of $27 at the height of the stock market rout in mid-January, few were calling its subsequent rebound.
In fact, as Chinese stock markets cracked, leading analysts were expecting it to hurtle lower, with Morgan Stanley predicting $20 a barrel, and Standard Chartered calling a price of just $10.
Yet within months the price had almost doubled to top $51, and suddenly the bulls were out in force again.
Commodity stocks such as metal and mining companies have also rebounded sharply from their January lows, with major London-listed stocks such as Anglo American and Glencore tripling in value in a matter of weeks after suffering major falls last year.
The oil and commodity rebound has also made fortunes for some far-sighted investors who were brave enough to buy at the bottom of the market. Others have been left feeling dizzy and disorientated.
Cheap oil has traditionally been a boon for the global economy, an effective tax cut that puts money into the pockets of western consumers and businesses.
Motorists spend less money filling up and can spend more on other goods and services, while the cost of transport and raw materials falls for companies, boosting margins.
This equation was reversed in the recent sell-off. Falling demand suggested that the Chinese growth story was slowing, the US had stalled and Europe was running out of gas.
It was also bad news for oil producers, with countries as diverse as Venezuela, Nigeria, Russia and Saudi Arabia suddenly finding their budgets under intense pressure.
Many feared it could even trigger another bank debt crisis, with 42 US shale producers going bankrupt last year, owing $17 billion, and Deloitte predicting one in three to sink this year.
The recovery of recent months has boosted confidence and driven stock markets higher, with oil and commodity producers among the biggest beneficiaries.
Yet the recovery has stalled in recent weeks, with Brent crude now trading at about $48 a barrel as markets absorb the Brexit shock. Is this the lull before the next oil price storm?
Angelos Damaskos has had a tough five years. He manages the mutual fund Junior Oils Trust and as the oil price plunged so has his fund’s performance, which is down by 71 per cent over the period.
Now he senses his fortunes are starting to turn as oil fights back and his fund, which targets smaller oil and gas explorers, jumps more than 17 per cent in the past six months.
Oil companies have been slashing capital expenditure, selling off assets and mothballing oilfields to survive low prices, and Mr Damaskos says this will eventually trigger a “supply crunch”.
He points to a report by analysts Wood Mackenzie, published last month, which shows that total exploration investment has now been cut by just more than $1 trillion, with the United States, Russia and the North Sea particularly affected (although the Middle East has held firm to maintain market share).
At the same time, demand is rising, with the International Energy Agency upgrading its demand growth forecasts for this year from 1.2 million barrels per day to 1.3 million bpd. The IEA anticipates similar growth next year when it expects global demand to hit 97.4 bpd. New forecasts from Opec also predict rising crude demand next year and falling supply from non-Opec members, which will reduce today’s oil glut.
Mr Damaskos says: “We believe the current oversupply should be cleared by the end of this year, which opens the way for prices to top $70 or $75 a barrel, then continue increasing.”
The price could rise even higher if supply is hit by further militancy in Nigeria and uncertain flows from Iran, Iraq and Libya.
The major oil producers are basing their plans on $65 a barrel and should perform well if this scenario plays out, but Mr Damaskos says that if you want to make serious money you should look past the vertically integrated majors such as BP, Exxon and Shell, and target mid- and small-cap stocks that offer much stronger growth opportunities.
He says there are plenty of opportunities in North America, particularly in overlooked Canada, where oil companies are using adapted shale technology to access conventional fields, boosting efficiency and production. “They know exactly where the oil is, they know exactly how much it will cost to drill and exactly how much return they will make on their capital investment.”
His favourite tips include RMP Energy, based in Alberta and traded on the Toronto Stock Exchange. “It has been quietly accumulating a lot of land and assets at extremely low prices and has great potential if oil recovers further.”
Tamarack Valley Energy has benefited from the recovery in gas prices, which have been hit even harder than oil. “As oil recovers, gas also becomes much more valuable and has political support as it is more ecologically friendly,” he says.
Mr Damaskos picks out two more Canadian energy stocks, oil and gas company Pine Cliff Energy and natural gas producer Painted Pony Petroleum, which also trade on the Toronto Stock Exchange.
He also tips North Sea-focused Serica Energy, a UK company traded on the London Stock Exchange, which recently bought the Erskine oilfield from BP. “It paid an extremely low price and has already increased its production dramatically to 5,000 barrels per day, but the stock remains cheap compared to its peers,” he says.
Finally, he tips two Australian natural gas producers, Cooper Energy and Carnavon Petroleum, both traded on the Australian Stock Exchange.
Mr Damaskos urges investors to look carefully at the company balance sheet to see whether it is resilient enough to withstand another oil price dip. “Companies such as Premier Oil and Tullow Oil have large debts and although they have been spared by the oil price recovery both remain risky to any slippage.”
Despite the rise of solar and wind, Mr Damaskos says renewables have a long way to go to replace oil as the fuel for the global economy: “The world still runs on oil and investors should reap the benefit.”
His forecast of $70 oil by the end of the year is more optimistic than most. The specialist website oil-price.net’s one-year forecast is just $53.
Laith Khalaf, an investment analyst at the independent financial adviser Hargreaves Lansdown in London, says the big danger for oil companies is that their fortunes depend on the price of crude, over which they have little control. “The turf war between Opec and the US shale producers means that a return to $100 a barrel looks unlikely. There could be further upside but it may take time and investors can expect some considerable choppiness along the way.”
He says the two London-listed oil giants, BP and Royal Dutch Shell, are an attractive play for long-term investors who want to generate dividend income in today’s low interest rate world.
As their share prices have fallen, the relative value of those dividends has risen and the stocks offer an impressive yield of about 6 per cent a year.
As Brexit further defers global interest rate hikes this generous income looks highly tempting, but be warned, it is not guaranteed.
Mr Khalaf says continuing low oil prices could eventually take their toll on BP and Shell’s dividends. “Shell has a proud record of never cutting its dividend since the end of the Second World War but it will struggle to maintain current shareholder payouts unless oil climbs higher. BP is in a similar position.”
Tom Anderson, an investment adviser at Killik & Co in Dubai, names BP as his preferred “mega-cap”. “It is well placed to respond to structurally lower oil prices after targeting $7 billion of cost cutting next year and a more disciplined approach to capital spending. It has lowered its break-even oil price of $60 to just $55 a barrel and the chance of it cutting its generous dividend is now low,” he says, adding that investing in individual oil stocks is only for the hardy.
Most investors, he advises, should spread their risk by investing in a mutual fund such as Blackrock Commodities Income Trust. “This invests in a range of energy and basic materials’ stocks, including US oil giants Exxon and Chevron, the London-listed global miner BHP Billiton, BP, Shell and others. The fund is currently at a discount of 4 per cent and paying an 8 per cent dividend.”
Helal Miah, an investment research analyst at The Share Centre in the UK, tips BP and Shell for their dividends, and mid-cap Tullow Oil for those willing to take a bit of risk. “Tullow has been hugely volatile and has also struggled because of its debt burden but a slow and steady rise in prices will be a huge relief and should see its share price recover materially. It still operates in resource-rich regions of Africa where governments have supported development of the oil infrastructure.”
Other options include oil services companies that provide the equipment and know-how to the drillers, such as Schlumberger and Halliburton in the US.
Volatile prices are not the only danger investors face when targeting smaller oil company stocks, as their share prices can rise or fall dramatically depending on factors such as the success of their drilling programmes.
It can be an exciting area to specialise in, but you have to be aware that this is a high-stakes game. If you are tempted to invest in the next leg of the oil price recovery you can lose as big as you win. Are you really ready to ride the roller coaster?
How to invest in oil shares without going through an adviser
Investing in individual oil company stocks may be risky, but it is surprisingly cheap and easy to do so using an online stockbroker.
Many UAE expatriates will have set up a trading account before leaving their home country, which allows them to buy and sell stocks for just a few pounds or dollars a trade.
For example, the companies listed in this article can be traded using a US or UK stockbroking firm. Investors should look for a site offering access to a wide range of international markets, including Wall Street, London, Toronto and Australia.
However, many of these stockbrokers will only allow existing residents to open new sharedealing accounts, so it can be tricky to do so from the UAE.
For those who do not already have access to a sharedealing site, a number of brokers offer trading services to expats.
Luxembourg-based TD Direct Investing International offers its services to UAE residents.
Fadi Mehdi, the head of the Abu Dhabi representative office at Danish-owned Saxo Bank, tells us: “UAE residents are free to open a trading account with Saxo Bank and trade listed shares, and can easily register on our site to open an account.”
IG Index opened in Dubai last September, while Killik & Co in Dubai also offers stockbroking services and the bank HSBC InvestDirect International offers offshore share dealing services to UAE residents.
Setting up a trading account is straightforward and takes minutes. Many sites allow you to set a virtual, or “demo”, portfolio to get the hang of trading before you actually put down real money.
Running a portfolio for several months can give you an idea of how much you can gain, and how quickly you can lose it.