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Why you must keep an eye on the oil price

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

A suspected terrorist attack on an Iran-owned oil tanker near Saudi Arabia’s port city of Jeddah has today sent the price of Brent crude, the international benchmark, 2.1% higher to just over $60 a barrel.

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Just days ago, some of the world’s largest energy traders seemed to be of the collective opinion that the price of oil, already sliding, was likely to slip further and could very well be trading below $60 a barrel in 12 months’ time. Not because production was reducing but more because of a predicted fall in demand as the global economy continues to slow.

Always volatile, trying to ascertain the probable future price of oil has certainly proved an even more slippery business of late. Terrorism, trade war, climate change activitism and econo-political upheaval have all shown they have the ability to impact on the price of oil.

Yet at the same time, it’s important to remember that oil is such a pivotal force of its own.

It’s the source of more than a third of the world's energy; more than coal and twice that produced by nuclear, hydroelectric and renewable energy combined. From trains to planes, transport relies on oil, for getting us, and the things we need, to where they need to be.

And aside from the impact the shifting oil price has on its use as a tangible commodity, it is also closely watched in its own right - making it arguably the most singularly important price in the world - because of what it tells us about the bigger picture. It is a key indicator of the global economy’s vulnerabilities.

As a result of that, it also has the ability to highlight investors’ vulnerabilities too. In the lower-for-longer environment we’re stuck in, the search for income has become ever tougher. But the top dividend-paying companies like BP and Shell, the world’s biggest-dividend payer, have a dilemma - if, or probably more inevitably, how they need to change what and how they operate in order to satisfy the increasing calls for a shift away from fossil fuels when, at the same time, their success - and profits - depend so heavily on meeting the thriving global demand for oil and gas.

It is a simple, yet oh so complex question, as Ben Van Beurden, Shell's chief executive so explicitly put it when he explained the need “to find a way to preserve that dividend-paying capacity, while at the same time growing the value of the company, while at the same time also changing the make-up of the company”.

The complexity of the global economic and political arena at the moment especially, makes the quest for investors trickier than ever. Navigating your way through isn’t easy, but we do have our latest live webcast coming up on Tuesday next week when Fidelity Investment Director, Tom Stevenson, will set out his views on the world’s economies, political machinations and their impact on the main asset classes.

There will also be plenty of opportunity for you to put your own questions directly to Tom. So, make sure you join us at midday on Tuesday 15 October.

Five year performance

(%)
As at 30 Sept
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Brent Crude -50.2 2.0 18.4 45.1 -26.3

Past performance is not a reliable indicator of future returns

Source: Refinitiv from 30.9.14 to 30.9.19 in US dollars.

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. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. Overseas investments will be affected by movements in currency exchange rates. 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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