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 week $100 oil went in a blink of an eye and with it all notions of a finely balanced energy market for some time to come. A supply crunch could be on the cards after the US and Europe began discussions about a possible boycott of Russian energy.

Having spiked to almost $140 per barrel on Monday, the crude oil price is now back at $1251. But compared even with the end of February, that’s still some jump. Excluding Russia, a crude oil price in excess of $150 looks feasible.

Brent Crude oil price chart

None

Source: Investing.com, Brent Crude oil price chart in US$, 1.1.21 to 8.2.22

It remains to be seen what OPEC (Organisation of the Petroleum Exporting Countries) can do. OPEC and its allied producers including Russia confirmed last week they plan to raise production by another 400,000 barrels per day in April2. However, Russia currently exports an estimated 4.7 million barrels per day, more than ten times as much3.

US shale producers could potentially fill some of the gap, but many are reluctant to do so having been burnt by previous boom-bust cycles.

Chevron and Exxon have said they want to lift production in the Permian Basin this year, however, planned increases in output of between 10% and 25% are not much more than a drop in an emptying ocean4.

The stark reality is US crude oil inventories continue to deplete. Last week, inventories fell by a further 2.6 million barrels and were 12% below their five year average for this time of year5.

The oil sector has been one of the few bright spots for investors so far in 2022. The argument has changed from one about underinvestment during the pandemic forcing higher prices to fears of a full-blown supply shock.

UK investors, in particular, are well prepared in this regard, with oil making up around 10% of the FTSE All-Share Index and 11% of the FTSE 1006. Exposures could be even greater for investors in actively managed funds where the manager has taken a positive position.

Fidelity Select 50 favourites Franklin UK Equity Income Fund and Liontrust UK Growth Fund  currently both hold overweight positions in BP (4.1% and 3.8% respectively) compared with a weighting of 2.9% in the FTSE All-Share Index. Both funds are a bit underweight Shell, with exposures of 4.9% and 4.7% versus 6.3% for the Index7.

The Russia-Ukraine crisis could mean a faster transition to cleaner sources of energy. Even prior to Ukraine, solar PV was being lauded as the cheapest source of electricity in history8. Gigawatts of electricity from clean energy sources including hydropower and wind have just become a whole lot cheaper versus oil.

The smart money today could be on investments such as the FP Foresight UK Infrastructure Income Fund, which also features among Fidelity’s Select 50 list of favourite funds. Managed by an award winning team of infrastructure investment specialists, this fund targets an attractive annual income from its investments of 5%, although this amount is not guaranteed. Large holdings currently include Greencoat UK Wind and NextEnergy Solar.

Five year performance

(%) As at 8 March

2017-18 2018-19 2019-20 2020-21 2021-22
Brent Crude Oil 32.0 -1.4 -66.6 278.3 203.1

Past performance is not a reliable indicator of future returns

Source: Investing.com, total returns in USD as at 8.3.22

Source:

1 Bloomberg, 08.03.22
2 OPEC, 02.03.22
3 Energy Intelligence, 02.03.22
4 Oilprice.com, 02.02.22
5 EIA, 02.03.22
6 FTSE Russell, 28.02.22
7 FTSE Russell, 28.02.22
8 CarbonBrief, 13.10.20

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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