THE SUNDAY TIMES (UK): Investors cash in on oil price boom: Crude is trading at record levels, but some experts say it could be time to bank profits, writes David Budworth.: “...could the oil boom be a bubble that is about to burst? (ShellNews.net) 27 March 05
March 27, 2005
INVESTORS have been charging into the oil sector as the price of “black gold” has rocketed.
On Thursday, oil was fetching about $54 a barrel in London, not far off its all-time high of $56.15, after an explosion at a BP-owned oil refinery in America.
However, there are other more fundamental factors behind the commodity’s 34% rise this year. Rising global demand for oil has been driven by strong economic growth in America and China, the world’s two biggest consumers of the fuel. The freezing weather that struck America and Europe last month has also helped to push prices higher.
But could the oil boom be a bubble that is about to burst? Saudi Arabia’s oil minister, Ali al-Naimi, said recently that the oil price was too high and that prices should fall back to the $40-$50 range. When crude falls, oil stocks such as BP and Shell tend to fall too.
However, the biggest casualties would be among smaller oil and mining companies quoted on the Alternative Investment Market, which have been inflated by frenzied speculation in recent weeks. Afren, a small west African oil firm, saw its share price more than double within an hour of listing.
Jeremy Batstone of Charles Stanley, a stockbroker, likes oil for the longer term but thinks it might be time to take some profits. He said: “Investors who are happy to trade frequently should consider locking in some of their gains. If you don’t hold any oil shares, consider buying if their prices fall.”
If you are a long-term investor, however, there are two main reasons why oil prices are likely to stay relatively high for the next few years at least.
Rising demand is expected to stretch the ability of producers to meet the market’s needs — and last week’s blast will not help matters.
The Organisation of Petroleum Exporting Countries (Opec), which produces 40% of the world’s oil, agreed recently to increase its output by 500,000 barrels a day. But the International Energy Agency expects oil demand to rise 2.2% this year, so it is not expected to have much effect on prices.
The supply of oil is hard to increase at short notice. Large-scale investment in wells and refineries faltered in the 1980s and 1990s when the oil price was low. Massive amounts of additional cash are therefore needed before supply will have any chance of catching up with demand. That is going to take years to achieve.
Adnan Shihab-Eldin, acting secretary general of Opec, said oil could hit $80 a barrel within two years.
Tony Nutt, who runs the Jupiter Income Trust, has invested more than 10% of the fund in BP and Shell on the assumption that prices will remain high.
He said: “The high price is boosting oil-company profits and enabling them to return a lot of cash to shareholders through higher dividends. I expect that trend to continue.”
The oil giants reported record profits last year. The five largest traded oil companies — BP, Royal Dutch Shell, Exxon Mobil, Chevron Texaco and Total — reported a combined net income of $85 billion (£45 billion) in 2004.
As the oil price and profits have soared so have oil shares. While the FTSE 100 is up just 2.3% since the turn of the year, shares in BP are up 8.5% and Shell has risen 7.8%.
Despite the increase, fund managers think oil stocks are still attractively priced. One of the most widely used measures of value is the price/earnings ratio. If a company has a p/e ratio lower than that of the market it may be cheap. If it is higher, the shares are likely to be expensive. The oil and gas sector has a p/e of 14.6, compared with 15.6 for the overall FTSE All-Share index.
However, there are clouds on the horizon. Consumers and companies could cut back on spending as higher energy prices bite. That would result in slower economic growth, a fall in demand for oil and eventually lower prices.
But, unless the oil price shoots up, most analysts hope the impact on global growth will be limited.
Andrew Fisher at Gerrard, a stockbroker, said: “If oil prices continue to trade at these high levels, they shouldn’t have the same impact on global growth as they would have 20 or 30 years ago when the energy- dependent manufacturing sector had a more pronounced role in the economy.”
The oil price still looks reasonable in historical terms. It is still well below its peak after taking account of inflation. Oil would have to reach $100 a barrel in today’s terms to match the prices of the 1970s.
If you want exposure to the oil sector, advisers usually recommend you stick to the two biggest companies, BP and Shell. Historically, they have tended to move in tandem so if you are in for the longer term you needn’t worry which one to go for.
Commodity funds invest in a spread of mining and oil companies’ shares, making them less risky. There are five commodity unit trusts: CF Ruffer Baker Steel Gold, JPMF Natural Resources, M&G Global Basics, Merrill Lynch Gold & General and First State Global Resources.
You should generally have no more than 10% of your portfolio in commodities, including oil.
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