If you haven’t noticed it at the petrol pumps yet, you will do soon. The price of crude oil has been rising steadily this year and has hit a five-month high.
This time it’s down to the Trump administration’s decision to end waivers that allow some countries to side-step the US sanctions on Iran. The waivers that allow eight countries including China, India and Japan to carry on buying oil from Iran will expire at the start of May. The White House has confirmed these will not be renewed, which has sent the price of Brent Crude up to over $74 a barrel, last seen in November last year.
The move is designed to put more economic pressure on Iran which has spooked markets concerned that we might see a shortage of supply. This is particularly important at this time of the year - the start of the US driving season - when demand traditionally starts to pick up from April through to September.
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. Unsurprisingly the share prices of British Airways owner IAG, easyJet and Ryanair fell on the news.
If prices are passed on to customers, it won’t be long before we start to see inflation rising in the UK which could lead to households reining in some of their spending.
Of course the impact is not just limited to the UK. As the US economy approaches the end of one of the longest bull markets in its history, investors will be questioning whether the world’s largest petrol consumer can absorb a higher oil price.
Fuel duty in the US is far less than here in the UK, so increases in the underlying price of oil are more noticeable. Donald Trump will also be watching the oil price closely. Ahead of next year’s Presidential election, he is keen to avoid a squeeze on the US economy from higher energy and fuel costs. The price of petrol is already at its highest level since last October. Another 10 cents per gallon and it would be at its highest level for five years.
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Having rebounded remarkably quickly from their December lows, US stock markets are reaching new all-time highs with the S&P500 this week overtaking its previous high reached last September. Even if we are at the end of the cycle, the US economy still appears strong, but ultimately dollars spent at the petrol pumps are dollars that could have been spent elsewhere in the economy. This could soon have a negative effect on the US market, which is so heavily dependent on domestic consumption.
However there are some definite winners. Oil’s latest move is positive news for investors in Britain’s global oil majors, BP and Shell. 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, the rising oil price means rising profits for the oil majors in the form of their share price and importantly their dividends. 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 low interest rates.
In our Select 50 list of favoured 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.
They both feature in the Invesco Global Equity Income Fund too which specifically looks for income-paying companies around the world.
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.