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Oil price winners and losers as tensions mount

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

“PLENTY OF OIL!” was the tweet from US President Donald Trump in response to news that US reserves had been released after more than 5% of daily global oil production had been knocked out by Saturday’s two attacks on Saudi Arabian facilities.

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As the price of Brent crude immediately jumped 10% to $66.28 a barrel, before surging nearly 20% to $71.95 at one point, the question is how much of a knock-on effect the attacks on Abqaiq and Khurais in central Saudi Arabia will have on the oil price. Saudi Arabia is one of the world’s largest oil exporters and for almost 50% of its production to be knocked out is going to have a significant impact.

This, of course, could run and run as the conflict between the US and Saudi Arabia on the one side and Iran on the other remains highly inflammatory; with the US “locked and loaded”, according to another of Mr Trump’s tweets.

US oil prices also spiked, but both those and the price of Brent crude eased back slightly after their initial spike as Mr Trump authorised the release of US reserves and, of course, sent that tweet.

Three scenarios are likely - a short outage is probably only likely to add a few dollars to the price, if it stretches into weeks rather than days then the price could rise as much as 20% and if there’s a longer outage we could see the price of a barrel of oil eventually hit anywhere between $75 and $100, if you go on the commentary and expert opinion that’s out there at the moment.

In terms of prices at the pumps, it’s a similar scenario. A short-term outage shouldn’t affect prices too significantly, if at all. It’s really only if it stretches into weeks or months that we could see it filter through with quite significant price increases.

A rising oil price affects us all in various ways and it’s not just motorists. Heavy energy users like airlines and chemical producers - depending on how well they have hedged in advance - will have to decide whether to absorb the price increases or pass them on to customers and that means airline fuel surcharges are also likely to rise if that’s the case. Unsurprisingly, the share prices of British Airways owner IAG and easyJet are down today.  

For now, oil reserves will provide a buffer. According to the Department of Energy, the US had 644.8 million barrels in reserve as of 6 September. Saudi Arabia has around 188 million barrels in reserve, according to energy consultancy Rapidan Energy Group. But the loss of some 5.7 million barrels a day from Saudi oil production because of these attacks is significant.

This of course, adds now even more uncertainty to the global picture. Oil price rises of significant proportions have, on numerous occasions in the past, coincided with a slow-down in global economic activity. With the global economic outlook already looking weak, this ongoing and escalating situation will just add more uncertainty to that which exists already; making for tricky times for investors.

However, there are some definite winners if the oil price does rise. It would be good news for investors in Britain’s global oil majors, BP and Shell, whose shares are in the top 10 share price risers today. Combined, these companies make up about 14% of the FTSE All-Share Index and they’re routinely held by many funds. Having cut costs to drill oil profitably when it was under $30 a barrel three years ago, an oil price spike would mean rising profits for investors from their share price and their dividend payouts. The dividends from oil companies are particularly attractive to income-seekers as they are forced to look to equities for a higher yield in this era of lower-for-longer-still interest rates.

In our Select 50 list of preferred funds you’ll find BP and Shell in the top ten holdings of most of our UK-focused funds, including the Fidelity Enhanced Income Fund, Fidelity Special Situations Fund, Franklin UK Equity Income Fund, JOHCM UK Dynamic Fund, JOHCM UK Equity Income Fund, Liontrust UK Growth Fund and Majedie UK Equity Fund.

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. Select 50 is not a personal recommendation to buy or sell a fund. 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.

 

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