By Michelle McGrade, Chief Investment Officer at TD Direct Investing
The price of diesel has started to plummet as the cost falls below petrol for the first time in 14 years. Although the price of oil has been dropping for the past 12 months it looks like it has taken the ‘supermarket wars’ to finally pass this reduction onto the consumer. But what does this fall mean for investors and what next for oil?
Oil Price Slide
It’s been about a year since crude oil prices more than halved from over $100 a barrel to around $50. The price has since appeared to stabilise at $60 for much of this year, but it’s still a challenging trading market for oil-related securities and oil slipped back below $60 in July for the first time in 12 weeks.
Effect of Falling Oil Price on investors
Popular stocks traded investors have been both helped and hindered by the sliding oil price. It’s been a tough trading environment for oil-and-gas operators such as Tullow Oil and LGO, both suffering double-digit percentage declines in the first three weeks of July. But investors have seen the upside opportunities from stocks benefiting from the falling oil price, most notably airline groups such as EasyJet, up 7%, in addition to BA’s owner International Consolidated Airlines Group flying higher, with a 14% gain so far this month.
Why has the oil price fallen?
Too much supply and not enough demand will push prices down in any industry and it’s the same for oil. Supply remains high as oil-exporting countries from the Middle East aren’t willing to cut back production for fear of losing their market share. Russia and Brazil are also unwilling to turn off the supply taps as both countries are stuck in recessions and need to keep pumping out oil to fill their treasury coffers. The US is one of the only oil-producing countries beginning to slow supply. Meanwhile, demand for oil remains sluggish due to slowing growth forecasts in some big gas guzzling economies particularly China, the second-biggest oil consumer in the world.
Will oil rebound?
A meaningful rebound is unlikely in the near term. Global inventories of oil are at record highs and more oil could flow onto the market from Iran following its nuclear accord with the West. Demand growth should pick up as the global economy improves but it will take a long time to overtake the current supply glut meaning prices could remain hovering around $50-$60 for some time to come.
Oil stocks and energy funds should look interesting for value investors given the cheap price-to-earnings ratios relative to other sectors and potential upside when demand surpasses supply. But momentum investors are likely to remain nervy on oil as there is a lot of negative sentiment surrounding the sector and a sustainable bull run in the near term is doubtful given the current imbalances in the oil market.
Over the next few weeks, we will be bringing you the latest thoughts, insights and opinions from leading Fund Managers on ‘what next’ for oil stocks.
Past performance is not a reliable indicator of future performance.