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.

LAST month’s shear drop in the oil price to just below US$70 per barrel compared with a high point of US$86 in late October broke a yearlong upward trend, promising some much-needed respite for motorists in the run-up to Christmas1.

As yet though, motorists have yet to see any benefit. According to the RAC, petrol prices rose for a twelfth consecutive month in November, to around 147 pence per litre2.

As a result, the RAC estimates the driver of a typical family petrol car was paying around £3.50 more than they should for a full tank last month3.

There is often a lag between moves in the oil price and prices paid at the pumps. However, high retail prices can eventually drop if oil stays depressed for an extended period.

Until October, oil prices appeared to be on a one-way trip into the stratosphere, as tight global energy supplies in the wake of the pandemic plus strengthening demand from consumers were putting the squeeze on prices.

Last month, the US and several other countries including the UK decided enough was enough and opted to release some of their strategic reserves into the market. Then the Omicron variant of the coronavirus hit, driving new fears of an economic slowdown and less travel.

So far in December, the oil price, currently US$74 per barrel, has shown signs of making a comeback.

That’s despite OPEC and its oil producing allies deciding last week to stick with their plan of raising output by 400,000 barrels per day in January4. OPEC is adding back to global supplies after reducing output by around 10 million barrels per day during the pandemic.

This suggests the forces underpinning oil prices are actually still quite strong and that, if petrol retailers do reduce their prices this month, motorists might do well to take advantage while they can.

Key to oil’s progress this month will be further information from the scientific community regarding the severity of the Omicron variant in relation to its Delta predecessor.

Events in the New Year, including any revisions to OPEC’s strategy and news regarding Iran’s possible re-entry into international oil markets, will continue to test oil’s resilience.   

Even so, latest forecasts suggest the world economy is only partway through its post-pandemic recovery, with growth anticipated to moderate only a little in 2022, to 4.5%5. America’s commitment to infrastructure spending – which was increased by US$550 billion last month – could have a sizeable additional impact on world energy needs for years to come.

These factors should continue to underpin the outlooks for BP and Shell that, together, account for appreciable parts of many UK equity funds. Shares in both companies have started December on the front foot.

Fidelity Select 50 favourites Franklin UK Equity Income Fund and Liontrust UK Growth Fund currently both hold overweight positions in BP (4.0% and 4.1% respectively) compared with a weighting of 2.7% for the FTSE All-Share Index6. These funds are both neutral Shell (with weightings of 5.0%).  

Source:

1 Bloomberg, 07.12.21
2 RAC Foundation, 03.12.21
3 RAC, 22.11.21
4 OPEC, 02.12.21
5 OECD, 02.12.21
6 FTSE Russell, 30.11.21

Important information: 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. Select 50 is not a personal recommendation to buy or sell a fund. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.

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