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Oil price spikes on Middle East tensions

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

The oil price is back in focus this week, following an attack on two crude oil tankers in the Gulf of Oman. The blasts caused the price of Brent Crude to spike over 4% yesterday from a near five month low, abruptly changing the course of its recent declines.

Oil price spikes on Middle East tensions

The US has blamed Iran for the attacks and further tension in the region will be of concern to investors, as the incident took place in the strategic Strait of Hormuz, through which at least a fifth of the world’s oil passes.

The attacks overshadowed a visit to Iran by Japanese prime minister Shinzo Abe that was aimed at easing already tense US-Iran relations, since the United States withdrew from a 2015 nuclear agreement with Tehran.

Over the past 12 months we’ve seen the price of Brent Crude swing from a peak of $86 a barrel at the beginning of October, to a low of just over $50 a barrel on Christmas Eve - a drop of over 40%. This year we’ve seen the oil price rise steadily to over $74 dollars in April, only to drop down since then to the present level of around $62 a barrel.

Earlier in the week data showing a rise in US stockpiles brought the oil price down as fears of a supply glut started emerging. Opec - the Organisation of Petroleum Exporting Countries - also cut its forecast for global oil demand on Thursday. This was in response to the escalation of trade disputes between the US and China and poorer economic performance in some emerging markets which, it believes, should dampen demand for oil in the near future.

Irrespective of whether or not the oil price starts to rise again in the wake of this incident, the oil majors have learned how to adapt to a lower price. Back in February BP said it was planning for a future of $60-65 a barrel, which is reassuring for investors in the company at these current prices.

Even with the rise of renewable energies and new government targets aimed at reducing the amount of carbon in the atmosphere, oil continues to play an important role in the world economy as people and goods are transported by air, land and sea using this key commodity.

With oil still firmly in the energy mix of most of the developed world, it’s understandable that oil producers are popular with pension funds as a key source of income through the regular dividends they pay out. This is particularly important in this current era of low interest rates.

The yield currently on BP shares is 5.9% and 5.8% for Shell. Though not guaranteed, these yields are comfortably above the average for the FTSE 100 which is 4.4% at present.

If you like the idea of having some exposure to oil for its income potential, BP and Shell feature in the top 10 holdings of a number of our Select 50 equity income funds, such as the UK-focused Fidelity Enhanced Income Fund and Franklin UK Equity Income Fund. We interviewed Colin Morton of the Franklin UK Equity Income Fund earlier this year which you can watch here.

Looking further afield, you’ll find Total and Shell in the Invesco European Equity Income Fund, while Total and Chevron join BP and Shell in the Invesco Global Equity Income Fund. You can also find Chevron in the JPM US Equity Income Fund.

Five year performance

As at 31 May
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Brent Crude -43.4 -21.9 -3.6 65.8 18.8

Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 6.2.19, in local currency terms with income reinvested 

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.