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.

THE Brent Crude oil price seems to have found its level at just over $90 barrel this month. Supply scarcity, an extremely cold winter in the US, the global recovery and tensions in Ukraine call for yet higher prices.

Set against this, OPEC and Russia have agreed to raise production by 400,000 barrels per day starting this month1. So which way will it go?

Barring a conflict in Ukraine – which seems a little less likely following recent diplomatic efforts, particularly between Russia and France – perhaps the biggest single factor is whether OPEC members are, in fact, currently in a good position to produce a lot more oil.

Given the lack of investment in new oil and gas supplies during the pandemic when listed companies were falling over themselves to build green energy portfolios, it’s doubtful they are.

True, a number of US producers appear to have been contemplating stepping up to the plate. Last week, America’s two largest shale oil producers – Chevron and Exxon – announced plans to increase their production in the Permian Basin by 10% and 25% respectively2.

However, it’s doubtful that moves like this can change the overall picture of a commodity in fundamentally short supply versus rising demand.

Last week, US crude oil inventories were about 9% below their five year average for this time of year3.  

At the weekend, the world’s largest integrated oil company Saudi Aramco said it would raise prices across the board in March, with the biggest price gains – about $1.70 per barrel – being applied to northwest Europe4.

So $100 oil really does seem to be on the cards.

Brent Crude oil price chart

None

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

Here in the UK, this is not at all good news for the 22 million energy customers faced with a record-breaking 54% rise in the price cap from this April5.

While the government has announced what amounts to a “buy-now-pay-later” scheme for customers, a further hike in the price cap probably already lies in wait in October.   

This grim news on the cost of living jars with the much improved outlook for oil producers. BP and Shell are probably looking ahead to a year in which they earn around £40 billion between them, in stark contrast to the cataclysmic profits crash both companies suffered in 20206.

The share prices of BP and Shell have made headway this year, to add to their recoveries in 2021. Yesterday’s annual results announcement from BP was predictably impressive, with the company reporting a net profit of US$12.8 billion in 2021 compared with a net loss of US$5.7 billion the year before7.

Fidelity Select 50 favourites Franklin UK Equity Income Fund and Liontrust UK Growth Fund currently both hold overweight positions (3.8%) in BP compared with a weighting of 3.1% in the FTSE All-Share Index. Both funds are now a bit underweight Shell, with exposures of 4.7% each versus 6.0% for the Index8.

Five year performance

(%) As at 31 Jan

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Brent Crude Oil 24.0 -10.4 -6.0 -4.0 63.1

Past performance is not a reliable indicator of future returns

Source: Investing.com, price index in US$ as at 31.1.22

Source:

1 OPEC, 02.12.21
2 Oilprice.com, 02.02.22
3 EIA, 02.02.22
4 Bloomberg, 07.02.22
5 Ofgem, 03.02.22
6 The Guardian, 05.02.22
7 BP, 08.02.22
6 FTSE Russell, 31.01.22

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. 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. 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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