The oil market has seen some severe challenges over the past five years. The pandemic up-ended global supply chains, and economic lockdowns devastated demand for the black gold, sending prices plunging briefly below zero.

As economies reopened and bounced back from the pandemic, oil demand surged, sending prices higher. Then Russia invaded Ukraine, setting off yet another market shock. 

The energy market is still recovering from this disruption, nearly two years after the conflict began. Recent events in the Middle East have only compounded market concerns about supply. 

And in the background, there’s another issue - the world is trying to move away from hydrocarbon energy sources as it attempts to slow the impact of climate change. As this shift gathers pace, some analysts predict oil demand will peak in the next few years. 

A challenging market

The oil market has always been challenging to try and predict. 

The world consumes around 100 million barrels of oil daily, of which just over a third was produced by the OPEC cartel of oil-producing nations - led by Saudi Arabia - in 2022, according to the US Energy Information Administration (EIA). 

OPEC+, which includes Russia, produces half as much again as the core group of OPEC countries. In total, the group of OPEC+ producers produce just under 60% of global oil consumption. 

The world’s largest producer is the United States. The EIA estimates the US produced 14.7% of the world’s total output in 2022, compared to Saudi Arabia's 13.2% and Russia’s 12.7%. Middle Eastern producers account for 30% of global output. 

This means the bulk of production of the vital commodity is in the hands of just a few producers. Moreover, approximately a fifth of global production moves through the Strait of Hormuz (according to the EIA), meaning any developments affecting this key supply route can have an outsized impact on global oil prices. 

Those are the risks on the supply side. On the demand side, oil prices are heavily influenced by global economic activity. Even a slight downturn in economic activity can impact global oil consumption and, in this finely balanced market, impact on prices. 

While the outlook for the oil market overall is unclear, there is a growing chance prices will remain elevated and possibly even move higher over the coming months. 

Supply constraints are a growing problem for the market 

A recent report from the World Bank laid out the challenges facing the market today. 

Oil prices have moderated from the peaks seen in the immediate aftermath of Russia’s invasion of Ukraine, an event the World Bank described as “traumatic for commodity markets,” but this should not be interpreted as a sign the challenges have passed. 

An escalation of the latest conflict in the Middle East could disrupt up to eight million barrels of oil production a day, both from producers in the region and tankers travelling through the Strait of Hormuz. That could send oil prices above $150 per barrel in the worst-case scenario, according to the World Bank. 

Oil prices could also receive support from a lack of investment in the sector. Financial service companies have faced increasing pressure to scale back their investments in fossil fuels to enhance their green credentials. But this is already causing alarm in some circles that a lack of investment will hit oil supply before green energy assets come onstream, putting upward pressure on hydrocarbon prices. 

At the beginning of October, OPEC Secretary General Haitham Al Ghais reiterated this warning, saying, "We are... running quite low on spare capacity, we have said this repeatedly, and this requires a concerted effort by all of the stakeholders to see the importance of investing in this industry."

As reported by Reuters, this view was echoed by the CEO of US oil producer Occidental Petroleum, Vicki Hollub, who has warned that low investments will drive energy prices higher.

The opportunity in energy 

The outlook for oil prices in the near term is uncertain and depends on how the situation in the Middle East and Eastern Europe develops over the next few weeks and months. 

It also depends, to a certain extent, on what happens in the global economy. If the US and Europe slide into a protected recession, oil demand will fall, which could weigh on prices. 

However, the outlook for oil prices in the next five years seems far more positive. Oil demand is projected to remain robust throughout the rest of the 2020s, but supply will likely come under pressure due to a lack of investment. 

There’s also a high probability the market will see further supply shocks, which will only add upside pressure to prices. 

With the risks skewed to the upside, the market may be missing the opportunity in energy.

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Since achieving independence around 200 years ago, Latin America has been a backwater in the world economy. But that will change as it becomes a key global supplier of everything from food to fuel. 

Leading the shift to renewables

The energy transition is becoming the most important economic trend in this century. And Latin America, home to huge reserves of the critical metals needed for the transition, will be the main beneficiary. 

Electric vehicles (EVs) use far more copper than cars with internal combustion engines. Latin America dominates copper production. Peru and Chile are the world’s largest producers of the red metal. Their 40% share of global output is similar to oil-cartel Opec’s control of the oil industry. 

The region’s share of the world copper market is likely to increase in the coming decades; geologists believe that Ecuador and Argentina could eventually mine as much of the red metal as their neighbours. 

The IEA estimates that global lithium production needs to triple between now and 2030 to meet the extra demand for the metal, which is a vital component in EV batteries. If that happens, then much will have to come from Latin America, which holds the majority of the world’s reserves.

Latin America also has the world’s “greenest” electricity grid. More than 60% of the region’s electricity is powered by renewable energy – more than anywhere else on the planet – and in some countries, such as Costa Rica, that figure is almost 100%. 

The abundance of renewable energy will also turn Latin America into a green-hydrogen super power. Hydrogen isn’t a natural commodity, but the product of an industrial process that involves using electricity to separate the hydrogen from oxygen in water molecules. 

The final Latin American energy resource I want to highlight is oil and gas. Hydrocarbons aren’t going anywhere. The adoption of EVs will help curb demand from carmakers, but oil’s use in plastic, petrochemicals, aviation fuel, asphalt, paint and industrial applications means that demand will continue to rise. Indeed, the IEA estimates that demand for oil will be slightly higher in 2050 than it is today. 

But regulators and investors favour cleaner oil and gas projects – those that emit less CO2 per barrel of oil produced – over dirtier ones. That augurs well for Latin America, which has 20% of the world’s oil and gas reserves. According to consultants McKinsey, the oil and gas produced in Argentina and Brazil emit less CO2 per barrel of oil equivalent than the world average. 

Food and nature

The energy transition isn’t the only trend working in Latin America’s favour. The world’s growing population – the United Nations estimates that it will peak at 10.4 billion in 2086, up from 7.9 billion today – will drive demand for food in the coming decades. 

Governments seeking to secure food supplies are already looking to Latin America. For example, an Abu Dhabi investment vehicle controlled by the brother of the United Arab Emirates’ ruler recently spent $2.7bn to acquire Colombian food conglomerate Nutresa.

Latin America contains almost 25% of the planet’s forests, a quarter of its cultivable land and one-third of its fresh water. It is certainly not immune to climate change and the types of crops that are grown in different places will alter over time as temperatures rise. But the abundance of water in the region, plus the vast swathes of unused arable land, mean that it will be our best option for meeting the growing demand for food. 

The crucial point isn’t just that Latin America has lots of resources; China and the US do too. The key is that Latin America is almost the size of China and the US combined with a third of the population. The region has less than 10% of the planet’s people, but a much larger share of its reserves of energy, metals and food, which makes it a natural exporter. And those exports will increase exponentially over the next few decades as superpowers compete to secure supply chains.

As the founder of the UK’s only Latin America-focused investment magazine, I know how hard it is to convince investors that Latin America is safer and more sophisticated than they realise. But one clear indicator is the massive technology boom taking place. Private investment in Latin American technology increased from $6bn in 2015 to a record $29bn in 2021, which was almost as much as India received. Internet penetration in Colombia, Brazil, Mexico, Chile and Argentina is higher than in China or India. The tech boom doesn’t just show that Latin America is more advanced than outsiders realise; it will also help increase economic productivity in the region. 

What to buy now 

In 2022, as the global economy recovered from the pandemic, copper reached a record price of almost $5 per pound. It’s now back at $3.77, having dragged the share prices of miners back down with it. 

That correction is driven by fears over the Chinese economy – in particular its construction sector. Yet given the looming shortfall in the global copper supply, it seems a fair bet that the price of the red metal will recover. 

One of the safest bets in the sector is Antofagasta (LSE: ANTO), a London-listed copper giant operating in Chile, the top-ranked mining jurisdiction in Latin America. Half of its output comes from the Los Pelambres mine, where production costs are in the bottom quartile of copper mines globally. It offers a dividend yield of 3.3%, which you can reinvest while you wait for the copper price to take off.

If you are willing to accept more risk, then you can take a punt on a project from one of Latin America’s frontier copper markets – Ecuador. SolGold (LSE: SOLG) is a London-listed explorer that has found one of the world’s largest copper and gold deposits. When its flagship Cascabel project is built it will be the world’s top underground silver mine, third-largest underground gold mine and sixth-largest underground copper mine. A quick disclaimer: I’ve invested a small amount in this company. 

Building a mega-mine in a country that only opened its first large-scale mining operation in 2019 isn’t easy. But the deposit is too valuable to Ecuador and the world to be ignored. The most likely outcome is that when SolGold advances the project a bit more, a major miner will buy the firm at a premium to the current price. BHP and Newcrest, which already hold significant stakes, are the most likely candidates.

Latin America’s role as the world’s sustainable breadbasket will become increasingly important – and lucrative – in the coming years. A safe way to play it is through Adecoagro (NYSE: AGRO), a South American farming giant listed in the US. It produces rice, wheat, corn and dairy products across Argentina, Uruguay and Brazil. It’s also a big biofuel producer, which links it to the renewable energy trend. Another firm at the intersection of food production and climate change is Bioceres (Nasdaq: BIOX), an Argentine developer of genetically modified (GM) seeds. The firm has developed new strains of wheat and soy that performed well in Argentina’s recent drought. It also has a crop-solutions business of biological herbicides that involves using GM technology to replace chemicals with active natural ingredients.

But the Latin American story is about more than just commodities. The “Latin American eBay”, Mercado Libre (Nasdaq: MELI), has risen more than tenfold since I first tipped it in MoneyWeek in 2013. It’s hard to keep tipping something when it’s already rocketed, but it will continue to profit from the region’s increasing digitalisation and wealth. Nubank, owned by Nu Holdings (NYSE: NU), is a Brazilian digital bank and Latin America’s largest fintech. After the hype when it listed in 2021, it’s now trading at more reasonable levels.

It looks increasingly likely that the age of oil is on the way out. We’ve been through previous cycles of optimism about other energy sources that didn’t change much: there was plenty of talk about government-backed growth plans involving massive renewables investment after the 2008 crisis, but considerably less action. While there has been increased investment and technological advances that have made renewables cheaper, the world still runs on fossil fuels.

However, it feels different this time. Climate concerns and geopolitical issues have created

a vast incentive for countries such as the US to invest in energy infrastructure (see right). The latest forecasts from the International Energy Agency (IEA), published last week, are clearly in line with that scenario.

The IEA thinks that demand growth will slow sharply in the next few years as electric vehicles replace ones that run on fossil fuel. Demand will rise by 2.5 million barrels per day (mb/d) this year, but by 2028 the annual increase will be just 0.4 mb/d. We’ll still use plenty of oil, but it will be petrochemical demand (and to some extent aviation, the hardest transport use to replace) that drives demand growth. Thus the IEA expects total demand of 105.7 mb/d in 2028 and still rising, but combustible fossil-fuel demand to hit a absolute peak of 81.6 mb/d in the same year.

The IEA’s forecasts have had “a questionable history” as Bloomberg puts it – ie, they are very often very wrong. Still, this outlook seems pretty plausible. It’s hard to see what would drive a much faster growth in fossil fuels in a world in which many major economies see the energy transition as a way to drive economic growth. The IEA estimates that more than $2trn is already lined up for clean-energy investment by 2030.

It’s harder to say what this means for oil prices. In the short term, demand doesn’t look especially bullish. Oil demand growth tracks global GDP growth, deflated by about 1.6 percentage points due to efficiency gains, argues Daval Joshi of BCA Research in a recent note. He thinks economic growth and oil forecasts are still too optimistic, and reckons crude could drop to $55.

On the supply side, the IEA is forecasting tight markets next year, on the basis that Chinese demand will rise and Opec will cut demand. That may be unduly bullish: more supplies from sanctioned countries (Iran, Russia and Venezuela) are making their way into markets, and Saudi Arabia’s unilateral cut this month showed that it is struggling to get its Opec peers to join in.

Still, weak prices discourage more investment: US active oil and gas rig have dropped sharply in recent weeks. Ultimately, around $70 may be the sweet spot – generating enough cash without encouraging firms to spend it. The worst scenario for investors would be for Big Oil to ramp up output in the face of the shift the IEA predicts.

Petrol and diesel prices have fallen in recent weeks and months, but still remain a major drain on household finances amid the cost of living crisis.

According to the RAC, the average UK cost for a litre of petrol is 143p, down from a peak of 191.4 in July 2022.

Diesel too has fallen over the past six months, down to 146p per litre from a high of 199p.

But how does the cost of filling up in the UK compare to the rest of the world?

Why is the price of petrol high in the UK?

Since the Russian invasion of Ukraine, the price of petrol has risen globally on the back of volatile oil prices and the rising cost of energy. Petrol prices are closely related to the wholesale cost of oil - a general rule of thumb is pump prices will rise by 1p for each $2 rise in the oil price.

But the price you pay at the pump in the UK takes into account a number of factors beyond the cost of oil.

Fuel duty represents roughly 35% of the cost of a litre of petrol, with the cost of wholesale petrol to the supplier being only the second largest component – accounting for roughly 29% according to an analysis by the RAC. This includes refining costs.

VAT, retailer profits, delivery and distribution and biofuel content all contribute to the overall cost.

The cheapest places in the world to buy petrol

According to globalpetrolprices.com, the cheapest place on Earth to fill up your car is Venezuela, at $0.02 per litre. Venezuela is home to some of the world’s largest oil reserves, and oil accounts for 99% of export earnings, says oil cartel Opec.

Next comes Libya, where a litre of petrol costs $0.40. Then comes Iran, with petrol at $0.50 a litre.

Filling up the UK’s best-selling car, the Vauxhall Corsa, would cost 80p in Venezuela but £65.20 in the UK/

The most expensive places to buy petrol

Hong Kong is widely recognised to have the most expensive petrol in the world at around $2.96 per litre. The country primarily relies on a small number of companies in Singapore to import petrol and transportation costs are high, with the costs reflected in what drivers are expected to pay at the pump.

Iceland shares some geographic limitations with Hong Kong and it too suffers from high fuel costs. A litre of petrol costs around $2.24, only a fraction more than the third most expensive country, Monaco ($2.22).

SEE ALSO

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How to cut your car’s fuel bill as the price of petrol hits a record high

Oil stocks are the biggest winners in the S&P 500, enjoying a rise of over 100% so far in 2022, according to data from online trading platform CMC Markets. If the upward trend continues, investors looking to take advantage of the S&P 500 best performers could do well from crude oil stocks.

Despite concerns around a global economic slowdown, the price of a barrel of Brent crude oil has been sitting around the $92 mark for some time now, and Opec+ announced a cut in production earlier this month that should ensure prices don’t fall again sharply even if major economies enter a recession.

We look at the best performing crude oil stocks in the S&P 500.

Best performing oil stocks

The best-performing stocks in the S&P 500 as of August 2022 were all oil stocks. Occidental Petroleum (NYSE: OXY) topped the chart, with a 126.8% share price gain in the 12 months to August.

Coterra Energy (NYSE: CTRA) and Hess (NYSE: HES) enjoyed gains of 61% and 51.9% respectively. Earnings for both companies reached new heights in the fresh half of 2022 as they both benefited from the fuel crisis in the US.

Exxon Mobil’s stock (NYSE: XOM) jumped 58.4%, benefiting from the increase in crude oil prices in the first half of the year.

Enphase Energy (NYSE: ENPH), which develops and manufactures solar panels and batteries, came fourth in the top five, benefiting from an increase in demand for solar power as energy prices soared throughout Europe.

Overall, oil and energy stocks’ success is probably due to surging energy prices in recent months and the maintained demand for crude oil, according to CMC Markets. In addition, some oil and gas companies “boast impressive dividend payments, which could have made them increasingly attractive to shareholders,” according to CMC Markets’ chief market analyst, Michael Hewson.

“It’s clear that these energy stocks are performing really well, as a direct result of what has been happening around the world over the last eight months,” he said. “However, because of this, it is not unlikely that these percentages will experience a drop-off by this time next year.”

The S&P 500’s worst performers

Many stocks that enjoyed great gains throughout the pandemic have struggled to maintain them. Tech companies in particular have suffered as investors worry that their good run might be over as life returns to normal. “People are back to travelling, socialising and commuting now, and this would definitely have had an effect on the stock price for certain companies,” said Hewson.

Netflix (Nasdaq: NFLX) is the biggest loser in the S&P 500, having dropped 62.7% so far this year. The company reported yesterday it had gained 2.4 million subscribers, which helped its share price. However earlier this year it warned subscriber growth had shifted into a reverse, which spooked investors.

Align Technology (Nasdaq: ALGN) saw a 57.2% dip in its share price. The company manufactures Invisalign, an “invisible” alternative to braces. Sales have dropped so far in 2022, which isn’t really surprising. The treatment is lengthy and costly, and consumers could choose not to invest in discretionary health products as they struggle with the rising costs of living.

Cruise operator Carnival (NYSE: CCL) has seen a 55% decline in its share price as it struggles to recover post-pandemic.

PayPal (Nasdaq: PYPL) came in fourth, possibly because its former CFO announced he was leaving the fintech firm for Walmart earlier this year which investors could see as a “possible threat to stability”.

Finally, Facebook’s parent company Meta Platforms’ (Nasdaq: META) share price declined 52.7%.

Just as fuel prices were sliding down, it looks like motorists could be hit with an increase again due to a steep production cut announced by Opec+, a group made up of some of the world’s top oil-producing countries.

Petrol prices had been falling in recent months as economies slowed and demand for petrol eased. In response, Saudi Arabia, one of Opec+’s members, said it was cutting production by two million barrels a day to avoid prices falling again as they did throughout the pandemic. Decreased production coupled with sustained demand would translate into higher prices in an already inflationary environment.

The price of a barrel of Brent crude had already increased on speculation of the cuts, jumping 2% on Wednesday to $93. However this is far below the peak of $139.13 in March, the highest level since 2008.

The White House said US president Joe Biden was “disappointed by the shortsighted decision to cut production quotas” as the global economy struggled with the impact of Russia’s invasion of Ukraine. He called on Saudi Arabia to help lower prices, but Abdulaziz bin Salman, Saudi energy minister, said Opec+ needed to “stay as a moderating force” for oil prices in the face of rising global interest rates and a slowing global economy.

Why could fuel prices rise?

The production cut is the deepest since the peak of the pandemic in 2020. According to the RAC, “such a deep oil production cut will inevitably see oil prices rise, forcing up the wholesale cost of fuel. The question is when, and to what extent, retailers choose to pass these increased costs on at their forecourts.”

Fuel prices have been coming down for the last three months, which has prompted some motorists to fill their tanks more frequently. However the RAC believes “in many cases drivers are being charged more to fill up today than they should be based on average wholesale prices over the last few weeks”.

If prices go up within the next two weeks, it could show retailers are “sticking to their strategy of taking far more margin on every litre they sell than they have historically – much to the dismay of drivers up and down the country”.

Will Opec’s cut affect investors?

What this means for oil stocks and their investors remains to be seen. High prices throughout the first half of the year were “extremely beneficial to oil majors like Shell and BP”, says Victoria Scholar, head of investment at Interactive Investor. “[They] scored sky high profits and impressive share price gains against the backdrop of broader stock market volatility and uncertainty.

“However the environment has become a lot more challenging lately for oil stocks given the four month losing streak and 25% slide for Brent crude off the highs.”

Just this morning Shell’s share price fell by 4% after it issued a profit warning due to a near halving of oil refining margins.

“Having said that, there is a chance we could be past the nadir for oil prices,” says Scholar. “Opec+ has demonstrated that it is committed to supporting the market and propping up prices.

“There is a tug of war taking place between the US, the UK and other oil importers which desperately want oil prices to fall to help ease some of their commodity-linked inflationary pressures. The slowing global growth outlook and softening oil demand are helping to push prices lower.

“On the other hand, oil exporting nations like Saudi Arabia and Russia are hoping to reverse the oil market's recent slide to boost their crude revenues and economic output. They have been contributing to the market's reversal this week by limiting supply.

“Whether the downward pressure from slowing demand or the upward pressure from supply cuts wins out is yet to be seen.”

Anyone filling up at the pump lately will have noticed that petrol prices are, once again, on the rise.

According to the RAC, petrol prices in December were the lowest they’ve been in the month since the pandemic. However, as of 23 January, they have since risen by 2p to 138.5p per litre for unleaded petrol. Diesel prices have risen by slightly over the same amount to 145.01p.

That pushes the cost of filling up a 55-litre petrol tank to over £76. An equivalent diesel tank will cost close to £80 to fill.

Like most energy prices, fuel inflation is mainly driven by the oil price, though other factors do influence what we pay for petrol. Oil prices are set at the global level and, unfortunately, are priced in dollars, so British drivers can be stung by fluctuations in the exchange rate.

At present, British motorists are being hit by an incendiary blend of upward price pressures on fuel, including increasing oil prices and a weakening currency. On top of that, government legislation has mandated a new fuel standard that has added to what Brits are paying at the pump.

Are oil prices increasing?

Most drivers will remember the oil price shock that took place in 2022. Effectively, when Russia invaded Ukraine, the retaliatory sanctions placed on Russian goods by the US and its allies, including the UK, effectively restricted the oil supply available as Russia is one of the world’s largest oil producers.

This sparked global inflation, as almost all economic activity uses oil for energy at some stage in the process. Price increases were felt most acutely at the pump. The RAC’s Fuel Watch shows unleaded petrol spiked to 191.43p per litre in July 2022.

Thankfully, petrol prices have trended downwards ever since, though there are always bumps and spikes along the way, and January seems to be one of these.

Increasing oil prices are part of the problem. Brent crude has increased 5.7% since the start of the year in dollar terms, and for British motorists that is compounded by the pound falling 1.8% against the dollar in 2025 so far. In other words, pounds now buy fewer dollars, and those dollars buy less oil, so pounds now buy much less oil than they used to.

There is some good news in that both these trends have reversed over the last five days. Donald Trump’s return to the White House has prompted a fall in the dollar, and his “drill baby, drill” mandate could increase global oil supplies. If he is successful in bringing a swift end to the conflict in Ukraine, that could bring global oil prices down even further.

What else is driving petrol prices?

Unfortunately, while it is a major driver, the price of oil isn’t the only factor influencing the price of petrol.

As of 1 January, suppliers of petrol now have to include a greater amount of low-carbon, sustainable fuel.

The Renewable Transport Fuel Obligation (RTFO) is a piece of government legislation that mandates an annual increase in the amount of sustainable fuel included in the fuel mix. This rose from 13.563% in 2024 to 14.054% in 2025.

Sustainable fuel is (currently) more expensive than fossil fuels. According to PetrolPrices, this could add between 0.3 and 0.4 pence per litre to the wholesale cost of fuels.

Where can you find the cheapest fuel?

In general, supermarkets tend to be the cheapest places to fuel up as they have certain pricing advantages over specialist forecourt operators. They buy at large scale, so benefit from discounted wholesale prices, and they are incentivised to offer fuel cheaply in order to attract customers into their stores. They also benefit from customers using loyalty cards (like Nectar or Clubcard) when filling up their tanks.

_{Source: RAC Fuel Watch, 23 January}

Among other brands, Asda Express is currently the cheapest (or Essar, if you count Asda Express as a supermarket).

_{Source: RAC Fuel Watch, 23 January}

If you’re trying to keep the cost of petrol down, avoid filling up on the motorway if at all possible, as their captive audience makes motorway service stations the most expensive places to buy fuel.

Like it or not, oil remains a vitally important commodity. While the price has dipped from its highs in the first half of 2022, the International Energy Agency (IEA) still expects global demand for crude oil to grow by 2.2% in 2023, thus topping pre-pandemic levels. Even if this is overoptimistic – the IEA admits that figure could well be lower – global oil usage only tends to drop during deep recessions.

Meanwhile, world oil supply is also uncertain, with concerns over Russia and oil-exporters’ cartel Opec. To cut a long story short, there’s a constant need for oilfield-engineering firms to provide a steady stream of “black gold” for consumers. As and when renewable-energy sources manage to supply most of the world’s energy needs, industry expertise will be vital in ensuring a smooth transition here too.

Enter John Wood Group (LSE: WG), a member of the FTSE 250 mid-cap index and one of the world’s leading consulting and engineering companies. It operates across energy and infrastructure markets, while employing 40,000 professionals across 60 countries. Its consulting division is a global problem-solver that aims to maximise the value of clients’ assets during their life cycles. It focuses on the energy transition and sustainable infrastructure development across a broad spectrum of markets.

Fingers in a wide range of pies

The projects division helps customers with project management, engineering, construction and procurement in sectors including oil and gas, chemicals, renewable energy, power, mining and minerals, and life sciences.

Finally, its operations arm does what it says on the tin, helping to manage businesses in areas ranging from transport and power generation to water and government infrastructure. The division provides maintenance, modifications, brownfield engineering, asset management and (where necessary) decommissioning services.

Given the backdrop of oil’s performance since Russia invaded Ukraine and the subsequent panics about energy supplies, you might have expected a stellar showing from Wood’s stock price in recent months – not least because the group is selling a consulting business, Built Environment (BE), to Canada’s WSP Global for $1.62bn (£1.35bn) in cash, which compares with the group’s current market capitalisation of just over £1bn.

Yet Wood has been a big disappointment for its investors over the last two months. From 250p around the end of May 2022, just before the sale of BE was announced, the group’s shares have plunged to below 150p.

A weak UK stockmarket over this period certainly hasn’t helped. Nor has the group’s delayed announcement of a $136m loss for the year to the end of December 2021 (Wood does its accounting in US dollars, the currency in which crude oil is also priced).

But fears about the possible effects of a near-term economic slowdown have probably done the most damage, even if – as I explain below – these appear unjustified.

Over the longer term, though, Wood has suffered several more problems. For example, in February of this year it raised its expected loss on an anti-missile facility for the US Army Corps of Engineers from $135m to $222m.

Indeed, one-off write-downs have seriously soured sentiment from early 2017. Since then the stock’s value has fallen by more than 80%. Furthermore, dividend payments ceased three years ago.

Clearly, during this period shareholders have experienced plenty of pain. However, that isn’t a problem for new investors. With the group’s long-term outlook improving, the stock-price plunge may be providing new buyers into Wood Group with a great recovery opportunity.

After peaking at a multi-year high at the beginning of June, oil prices have tanked over the past couple of weeks.

The price of Brent crude oil has dropped more than 15% over the past month while WTI crude has slipped nearly 17%.

As oil prices have fallen, oil companies have fallen out of favour with investors. The MSCI Europe Energy 35/20 Capped Index, which is designed to provide investors with a benchmark of large and mid-sized European energy companies, has fallen by nearly 11% over the past month, although it remains up 21.9% year to date.

However, the performance of oil futures and oil stocks is becoming increasingly disconnected with the situation on the ground.

The supply and demand fundamentals of the oil market

Now that Russia has been ostracised from global oil markets, especially in the West, other producers are struggling to fill the gap.

Short-term disruptions such as lockdowns in China, the rising cost of living and the potential for an upcoming recession might push demand lower in the near term. But over the longer term, the prospects for the oil market still seem attractive.

According to projections from the Opec cartel of oil-producing nations, average oil demand is projected to rise by 2.7 million barrels per day next year to 103 million overall. Supply from non-Opec countries is expected to grow by 1.7 million barrels a day leaving the group to pick up the remainder. That could mean the region will have to raise output to as much as 33 million barrels per day.

Of course, these are only projections and I would caution against reading too much into the data. Opec has no idea how the economy will react to current pressures and there’s already some indication that high prices are having an impact on demand.

Still, the most important figures are production figures. The International Energy Agency (IEA) estimates that Opec can only produce 34 million barrels per day in the best case scenario, which includes output from Iran.

It’s not clear if this group of oil producers will even be able to meet this target as many nations are already under-producing compared to their existing output targets.

Then there’s the Russia wildcard. Russia produces around 10 million barrels per day. If its production drops by 10% or 20% it’s unclear if the world would be able to move quickly enough to replace that production.

Take all of these factors into account and while there is a risk that oil demand could drop and put further downward pressure on prices, I think it’s more likely prices will remain buoyant. As such, I reckon there’s an opportunity to buy shares in oil producers after recent declines.

Picking London’s best oil companies

I looked at London-listed oil and gas companies with a market capitalisation of more than £50m, and which have generated a positive free cash flow over the past 12 months. There are 17 of them.

The big oil companies, namely Shell (LSE: SHEL) and BP (LSE: BP) sit at the top of this list. These industry behemoths are by far my favourite ways to invest in the industry. Their diversification gives them a level of protection against oil price uncertainty and their size means they can achieve substantial economies of scale when dealing with suppliers.

Still, smaller producers offer more leverage to higher oil prices (although they do come with more risk). That’s why, if I was looking for a leveraged play on the price of oil, I would also own a basket of smaller production companies.

Excluding Shell and BP leaves 15 names. Of these I’m going to throw out Hurricane Energy (LSE: HUR) and EnQuest (LSE: ENQ) due to their weak balance sheets. Enwell Energy (LSE: ENW) is also out as most of its operations are based in Ukraine. Phoenix Global Resources (LSE: PGR) is out because it’s heavily loss-making (although it did generate a positive free cash flow last year).

Of the remaining names, Genel Energy (LSE: GENL) and Gulf Keystone (LSE: GKP) both focus on the Kurdistan region of Iraq. Meanwhile, Seplat Energy (LSE: SEPL) and Savannah Energy (LSE: SAVE) both have interests located in Nigeria and West Africa. Nigeria and Kurdistan both have a history of economic volatility and political uncertainty. As such, I’m not entirely comfortable investing alongside these companies.

That leaves seven names:

1. Serica Energy (LSE: SQZ)
2. Tullow Oil (LSE: TLW)
3. Harbour Energy (LSE: HBR)
4. Parkmead (LSE: PMG)
5. Jadestone Energy (LSE: JSE)
6. Diversified Energy (LSE: DEC)
7. I3 Energy (LSE: I3E)

Avoiding the companies that are struggling to create value

Diversified Energy has the highest dividend yield in the FTSE 250, at a staggering 13.4%, but there have been some questions about the company’s accounting practices and the cost of maintaining its production. As such, while I like the dividend, these operational corners put me off the business.

I’m avoiding Tullow for a similar reason. In recent years the company’s production has slumped due to operational errors. I’m not sure the business will be able to turn it around.

Parkmead’s market value sits at just £56m so it’s a tiddler in the market. Nevertheless, the firm’s portfolio of low-cost onshore gas assets in the Netherlands could help it generate revenues of £11.6m this year, according to Refinitiv analyst estimates, up from £3.6m. Net profit will hit £3.3m from a loss last year.

I3 Energy has assets in the UK and Canada, but it is spending heavily to maintain and grow production. While profits are expected to jump this year, high levels of spending could eat into shareholder returns in the long run. The company has already increased the number of shares in issue by 11 times in the past two years.

Jadestone has a much better record of shareholder value creation. After growing production by 10% last year, management is planning to boost output further by 36% this year from its US and Asian assets.

The group reported $180m of cash at the beginning of June, which is enough to fund its growth plans and return $100m to investors. Refinitiv analyst estimates have the company earning $114m this year putting the stock on a forward price/earnings ratio (p/e) of 4.5. The yield stands at 2.1%.

North Sea producers lead the pack with high profits

The last two companies, Serica and Harbour are both North Sea oil producers. While the government’s windfall tax will hit earnings, the fact that both are established businesses in a stable jurisdiction, with low production costs and strong balance sheets are all reasons to buy in my opinion.

It looks as if Serica is going to merge with Kistos (LSE: KIST). Both have made offers for each other in recent days, and I wouldn’t be surprised if one company wins out. Kistos only listed on the stockmarket last year and is half the size of its peer. Combined, the two would have production of 40,000 barrels per day and would be a force to be reckoned with in the North Sea.

Serica earned £28m in 2020 and that shot up to £415m last year. Analysts think the firm will earn £808m in 2022. Kistos (which will have to borrow heavily to buy its larger peer) has a portfolio of low-cost assets, and it is projected to see its earnings rocket from £64m last year to £441m this year. If I had to pick two producers for a portfolio, I’d buy both ahead of a deal.

Harbour Energy is the North Sea’s largest independent producer with production averaging 200,000 barrels per day. High oil prices are enabling management to put the business on a stable footing for the foreseeable future. It expects to be debt free by the end of 2023 even though it is ramping up capital spending. Harbour’s Tolmount gas field will increase the UK’s gas production by 5% when it comes onstream next year.

Along with Serica, Kistos, Jadestone and Parkmead, I’d buy Harbour Energy as part of a basket of London-listed explorers to capitalise on the tight oil market that’s expected to prevail for the foreseeable future.

Worldwide spending on the shift to low-carbon energy rose by 27% to $755bn in 2021, according to a new report from research group BloombergNEF. This illustrates just how strong investor appetite was becoming for cleaner and greener technologies, even before Russia’s invasion of Ukraine turned global energy markets upside down and pushed some of the world’s largest consumers of fossil fuels to think seriously about renewable energy options.

Despite the shift in sentiment, even the most upbeat forecasts do not expect a big move away from oil, gas and coal any time soon. Oil cartel Opec believes that oil and gas demand will rise steadily to around 106 million barrels a day in 2030, before starting to decline in 2035. This partly reflects the fact that demand for electricity is growing faster than renewable capacity can keep up. According to the International Energy Agency, global electricity needs rose 5% last year, with fossil fuels generating 45% of the extra demand. New renewables capacity is expected to cover only about half the extra demand this year.

As Tesla boss Elon Musk noted on the group’s first-quarter 2021 earnings call, “if all transport goes electric” the world will need to double its current electricity output. Based on today’s trends, there’s no way we will be able to build enough renewable capacity fast enough to meet this demand (barring a giant leap forward in technology). These figures illustrate the challenges policymakers face in trying to drive the green agenda forward – but they also show just how big the opportunity is for businesses with exposure to the sector. One commodity will benefit, no matter how the energy mix changes in the next 15 years: copper.

Global copper demand is soaring

In April last year, the commodities team at Goldman Sachs published a report on the state of the global copper market titled Green Metals: Copper is the New Oil. The title says it all. Not only is copper a key component in all clean energy technologies, but it’s also an essential part of today’s digital economy. From skyscraper-sized wind turbines to the circuits in wireless headphones, every piece of equipment that uses or produces power requires copper.

As Goldman notes, green technologies might be better for the environment in some respects, but they are far more copper-hungry than older technology. Electric vehicles require four times more copper than internal combustion engines. A three megawatt (MW) wind turbine can contain up to four tonnes of copper (and the most powerful turbines can produce up to 14MW of power). The bank’s analysts predict that copper demand from electric vehicles alone could hit as much as 3.2 million tonnes (mt) by 2030. Overall, it’s forecasting an extra 5mt of demand by 2029, equivalent to 16% of global production today.

Goldman isn’t alone in this view. Last year, Gary Nagle, the head of Glencore, one of the world’s largest commodity companies, told the Financial Times that the copper supply would need to rise by an extra million tonnes a year by 2050 to meet green energy targets. As most of the world’s easy-to-access copper deposits have already been mined, Glencore reckons the price of the metal will have to hit $15,000 a tonne to justify further investment. That’s around 67% above current levels.

The challenge for producers (and indeed the world) is that it’s not terribly easy to set up a new copper mine. It takes about three years to expand a mine and eight years to start a new one. Nor are there many alternatives to copper. Aluminium is one, but it has only 61% of the conductivity and is less durable (the aluminium market also has its own supply issues). Freeport-McMoRan’s CEO summed up the state of the industry in 2021 when he said, “the price of copper could double overnight… and we couldn’t add new production of significance for a number of years”.

Legacy of the boom-bust cycle

To understand how the copper market has reached this stage, we need to go back to 2011. The price of copper surged by nearly 500% from mid-1993 to February 2011, and miners rushed headlong into the market. They capitalised on crisis-era central bank policies to borrow huge sums to invest in ramping up copper output. Unfortunately, just as these projects started to come online, copper’s value slumped. By 2015, the copper price had crashed more than 50% from its peak.

In 2015, analysts at Morgan Stanley estimated that between 2005 and 2014 the sector’s three largest operators, Rio Tinto, BHP and Anglo American, had spent $246bn on capital projects, overloading global commodity markets with supply. They lost nearly $50bn between 2011 and 2014 in the resulting crash.

After these losses, miners revisited their spending plans. Rather than chasing extravagant “growth-at-any-price” projects, managers began focusing on cutting costs and improving efficiency. Output growth suddenly became very “uncool”. As a result of this new operating model, the number of new copper projects under development and in the design stages has plunged by 60%. Although some new projects are slated to come on stream over the next few years, they’re not going to be sufficient to meet exploding demand.

World’s largest producer

The most important region in the world for the copper industry is Chile. More copper is mined in the South American country than in any other nation on earth. Six of the top ten largest copper mines in the world are located in Chile and its state miner, Codelco, is the world’s largest producer of the commodity. Codelco produced 1.7 million tonnes of fine copper from its own operations and joint ventures in 2021.

However, output growth is being hampered by another issue: water scarcity. In April, Chile announced an unprecedented plan to ration water as the country’s drought entered its 13th year. It now has some of the worst levels of water scarcity in the world. As you might imagine, producing copper requires a huge amount of water. In 2019, it was estimated that Chile’s mining industry consumes around 500 million litres of water a year.

With access to water limited, the supply picture for copper becomes a lot more uncertain. Codelco has plans to build desalination plants to solve its water issues, but this will take time and money. The company is looking for funding partners on 34 new projects across the country, its first such move into joint exploration. Still, even if Chile can find the water, money and partners it needs, it’s going to take years to bring new copper to the market.

Biggest “green metal” producers

Besides Codelco, the largest producers of copper are Freeport, BHP and Glencore. BHP and Glencore have an advantage over the Chilean and American miners as they’re well diversified. Copper is only part of BHP’s portfolio, alongside iron ore, nickel and coal. Glencore also produces copper and coal, but its mines also draw zinc, lead, cobalt, nickel, gold and silver. According to Rystad Energy, global nickel demand is expected to outstrip supply by 2024 as it is a key component in both steel production and batteries for electric vehicles. Battery demand also accounts for around two-thirds of global demand for cobalt.

In some respects then, Glencore and BHP are some of the best ways to invest in the green energy boom. Not only do they provide exposure to the metal itself but also other key components of the battery supply chain. Still, there are some drawbacks to investing in these businesses. As well as producing commodities, Glencore trades commodities around the world through its marketing arm. This business can be highly profitable and it’s also pretty difficult to get into, which gives the group a competitive advantage. No other company in the world has as much insight into global commodity markets as the trading giant.

This year the trading house has been capitalising on what it is calling “pricing differentials” in disrupted energy markets. As a result of these “differentials” the company expects half-year adjusted earnings before interest and tax (EBIT) of $3.2bn for its marketing and trading arm this year. That’s at the top end of management’s long-term EBIT guidance band.

However, Glencore does not provide granular information on how this side of the business operates. In fact, it’s a bit of a black box. Trading commodities requires access to huge amounts of short-term capital to fund purchases. This money is paid back when the commodity is delivered to a client, and to make sure it doesn’t lose out on the deal, Glencore also relies on derivative contracts to guarantee a fixed price on delivery. On a day-to-day basis the corporation may have tens of billions of dollars of short-term loans outstanding with billions more in derivative contracts. So in some regards Glencore is an investment bank as well as a mining group.

BHP does not have the same financial exposure. Unlike Glencore its primary business model is and has always been producing commodities. Over the past five years, BHP has undergone a significant transformation. It has cut costs and dramatically improved efficiency, putting it in the perfect place to capitalise on the current commodity price boom. Last year the group generated operating cash flow of $11.5bn and free cash flow of $8.5bn. BHP is a lot easier to understand than Glencore primarily because it does not have a trading business. Strong cash flows have allowed the group to reduce net debt to $6.1bn (from $11.8bn in 2020) and distribute record amounts of cash to investors. Over the 18 months to the end of December, BHP returned $22bn (£18.3bn) to shareholders. To put that into perspective, there are only 26 companies in the FTSE 100 with a market capitalisation greater than £18.3bn.

BHP was kicked out of the FTSE 100 earlier this year when the company consolidated its dual UK-Australia listing, but UK investors can still buy the shares on the London Stock Exchange.

Investors cannot ignore the environment

Copper has an important role to play in the 21st century economy but the environmental issues facing the industry need to be considered. As the world becomes increasingly aware of the environmental cost of global development, governments are bringing in new rules that increase the cost for producers. Consumers are also becoming more aware of where goods and services come from. In this environment, corporations need to be thinking about their environmental impact.

In most regions around the world, policymakers are developing instruments to encourage businesses to think about their impact on the environment. These range from measures as simple as banning plastic bags to those as complex as carbon emission trading schemes.

Taxes are another tool policymakers use to force companies to change their ways. Chile is working towards introducing a mining royalty bill, which will dramatically increase royalty taxes on mining groups extracting copper and lithium. Support for the bill has grown as corporations such as BHP are seen to be raking in billions of dollars in profits while the country rations its most essential resource: water. Meanwhile, 70% of the world’s cobalt comes from the Democratic Republic of Congo, where Glencore has a large operation. The region’s questionable labour laws have resulted in some difficult questions for the miner.

New environmental rules and regulations could increase the cost of doing business for these companies. While rising copper prices might offset some of the extra cost, it is something to bear in mind, especially as the world becomes more aware of its impact on the environment. Miners could also be hit with large fines if they breach environmental standards, which would almost certainly have an effect on shareholder returns, and their reputation in the mining community.

Still, there’s no denying that these businesses have a vital role to play in helping the world clean up its act. If policymakers are serious about getting emissions under control, they will have to work with miners to find a solution to these issues. A balance will need to be struck between all stakeholders. Meanwhile, we look below at how you can get exposure.

How to invest in the long-term copper boom

A good place to start looking for the best opportunities in the copper business is with a look at the copper production cost curve. For the bulk of the industry, the average production cost for one pound of copper is in the region of $1.20, although for some producers the cost can be as high as $3 per pound.

Australian mining company OZ Minerals (ASX: OZL) is one of the lowest-cost producers of copper in the world. Its cash cost per pound of copper last year was just $0.64, well below the sector average. While the firm is much smaller than some of the sector’s larger players (last year it produced 125,000 tonnes of copper compared with BHP’s 1.5mt) its low-cost model is incredibly appealing.

Canadian miner Lundin (Toronto: LUN) is another low-cost producer, with an average cash cost of below $1 per pound. The group is roughly twice the size of OZ and recently paid $483m to acquire Josemaria Resources, owner of the Josemaria project in Argentina. While still at an early stage, projections suggest it could increase Lundin’s copper output by a third for a cost of $4bn. That’s a big bill, but with $700m of net cash at the end of March and copper prices rising, the business should be able to afford it.

Three other options are London-listed Antofagasta (LSE: ANTO), Freeport-McMoRan (NYSE: FCX) and Teck Resources (NYSE: TECK). Both Antofagasta and Freeport sit at the higher end of the copper cost curve, with an average cash cost of production of $1.87/lb and $1.29/lb respectively, even though they are some of the largest pure-play copper producers on the market.

Teck’s cash cost sits in the middle of this range, but it’s the company’s growth prospects over the next couple of years that are really exciting.

The group is undertaking a major expansion of its Quebrada Blanca project, which will roughly double copper production when it comes online in the second half of the year, at an average cash cost of $1.24/lb.

On top of this project, Teck has five other mines in development. Management pegged the value of these projects at $3bn in 2017, when the price of copper was significantly below current levels.

The group has the cash to fund these projects, mainly as a result of surging coal prices. Coking coal for steel-making currently accounts for approximately two-thirds of Teck’s output, and thanks to rising prices, gross profit from this division hit $1.8bn in the first quarter, up from $196m in the same period last year.

For broad exposure to the sector the Global X Copper Miners ETF (LSE: COPX) holds Teck and Glencore as two of its top three positions. The BlackRock World Mining Trust (LSE: BRWM) is my favourite investment trust pick in the sector. The largest single stock holding is Glencore and 20% of the portfolio is allocated to copper stocks, with 41% in diversified miners (including firms with exposure to copper production). The trust also comes with a dividend yield of 6%, an attractive level of income in today’s interest-rate environment. The trust is trading roughly in line with its net asset value, reflecting the sector’s popularity.

SEE ALSO:

Industrial metals: electric vehicles are driving a boom in prices

Three stocks that will profit from electric-vehicle growth

The UK’s new energy strategy has been revealed – here’s how you can profit

“The oil price says a trans-Atlantic recession is almost nailed on,” says Russ Mould of AJ Bell. “Since 1970, the oil price has doubled year-on-year six times and on four of those occasions the US and UK have gone into recession within the next two years.” At around $116 a barrel, Brent crude is up by 475% since its March 2020 nadir. “Everyone is waiting nervously to see if 2021 makes it five out of six.”

Prices got an extra boost this week as G7 leaders discussed plans to impose a price cap on Russian oil. That may exacerbate existing supply problems. “About two million barrels a day of Russian oil and refined-product supplies” are unable to enter global markets at present because of sanctions, says Myra Saefong in Barron’s. “US production, meanwhile, hasn’t climbed back to pre-Covid-19 levels” because of “pandemic-related labour shortages and supply-chain constraints”.

Don’t expect Opec+ to ride to the rescue either, says Pavel Molchanov of bank Raymond James. The producer group, which includes Saudi Arabia and Russia, underproduced its output target by 2.616 million barrels a day in May. There is “very limited spare capacity in the Middle East, and none outside the Middle East”. Iran has capacity, but its exports are subject to sanctions.

Enthusiastic oil bulls dominate online conversations about energy, says Jared Dillian on Bloomberg. Many “predict oil will rise to $200 a barrel. In fact, call options with a $200 strike price have traded rather briskly in recent weeks”. Yet fears of a recession have seen oil prices fall 7% since they topped $124 a barrel in early June.

When oil prices rise, people start to reduce consumption. “The only constant in financial markets is that when bullish or bearish sentiment becomes crowded, it is usually profitable to go the other way.”

Is there a glut of oil on the way? It doesn’t feel like it at the moment. Years of well meaning lack of investment into fossil fuels have tightened the market (the effect being similar to that of the Opec crisis in the early 1970s) and most analysts are now assuming the supply and demand mismatch will last for some years to come. But is this just to make yet another extrapolation mistake?

In most commodity markets, the cure for high prices is high prices – and there is no reason to think this will be any different, says Max King in this week's magazine. Already, governments and investors are busily backtracking on their opposition to fossil-fuel investment and there is likely be a “significant supply response” from Opec, the US (shale) and Venezuela. This time next year and it may be that the £100 tank of petrol is nothing but a distant nightmare, something that could solve a lot of our problems.

The real causes of inflation

Not everyone is convinced by this. Barry Norris points out that investment in the search for new oil and gas reserves is down 66% on a decade ago, and in this week’s podcast Charles Schwab’s Liz Ann Sonders notes that the environmental, social and governance (ESG) agenda is very much at odds with support for fossil-fuel exploration.

It also may not make the definitive difference the optimists think. The truth is that much as it suits politicians and central bankers to blame inflation on oil prices – and to claim oil prices are only up as a result of war in Ukraine – inflation is caused by governments. But inflation is really the result of politicians “trying to do too much too quickly”, says Andrew McNally of Equitile investments (quoting a 1974 speech from Keith Joseph, later Margaret Thatcher’s head of policy), creating and spending far too much money in the process.

This happened in the run up to 1974 when governments (terrified that they may again see the mass unemployment of the 1930s) tried to spend their way out of their problems. Government spending relative to GDP is at a historic high in the UK (albeit not quite as high as it is in many of our EU neighbours) and “higher inflation always follows higher spending”.

Our government is once again trying to do too much (see Matthew Lynn's column this week on why borrowing your way out of a crisis rarely works) and doing so while also enacting policies that are hugely destructive to the private sector – think lockdowns, the green agenda and the relentless rise of regulation.

Getting a grip on government

Note that the number of people working in the civil service is up 24% since 2016. The state is too big; it costs too much – and at some point it will be clear that it is crowding out the private sector. Not much long-term good can come of this. Oil prices may or may not self-correct, but unless governments get a grip, stagflation – and its nasty effects on our wealth and our living standards – will not.

MoneyWeek is in (fairly) rare agreement with The Economist on this matter: it is time for the UK to start making a few more of the hard choices that lead to long-term wealth and fewer of the feel-good ones that have got us where we are today. Markets like this kind of thing: by the end of the 1970s £100 invested at the top of the market was worth only £61 in real terms. By the end of the 1980s (after some work from Thatcher and Joseph) it was worth £261.

In early October 2020, shares in BP (LSE: BP) fell to a multi-decade low as investors rushed to dump their holdings of the oil and gas giant, questioning its very survival.

Today the firm’s outlook could not be more different. A mismatch between supply and demand was already causing prices to rise at the beginning of the year, before the war in Ukraine added fuel to the fire.

What followed has to be one of the biggest ever U-turns in global energy policy. Only a couple of months ago, policymakers were setting out plans to reduce global hydrocarbon production for good, but now they’re rushing to drive up supply.

The government recently approved Shell’s (LSE: SHEL) Jackdaw field, east of Aberdeen, which has the potential to produce 6.5% of Britain's gas output, after rejecting it on environmental grounds in October.

Unfortunately, it is going to take months if not years for supply to match the world’s seemingly insatiable demand for hydrocarbons. Even major swing producers – namely the Opec cartel – are struggling to ramp up output despite higher production targets.

The supply and demand imbalance has sent prices surging

Global oil and gas markets have responded the only way free markets know how when demand outweighs supply – prices have spiked.

The Brent crude oil benchmark has jumped to $120 a barrel, returning to levels not seen since 2008. Meanwhile, natural gas prices in the US are up by nearly 160% in the past 12 months (while in the UK and European markets prices have risen by 150% and 227% respectively – gas is not a global market). Some analysts are now speculating that oil prices could hit $180 or more in the months ahead.

In this environment it is not surprising that BP and its Big Oil peers are minting cash. BP announced bumper profits for the first quarter of 2022 while Shell’s quarterly income hit a record. Refinitiv broker projections for BP are currently estimating a 48% jump in income for 2022. Shell’s earnings look likely to more than double, from $1.72 per share to $4.80.

Rishi Sunak’s windfall tax on North Sea oil producers has done little to dampen City growth expectations. According to analysts at Citigroup, because of spending on decommissioning of aged-out infrastructure, these Big Oil producers are already “tax negative” in the UK. That said, analysts at Jefferies have estimated that the tax could cost BP $100m in 2022 and $800m in 2023, just 5% of total group net profit.

Investors should not overlook BP’s progress

BP is not the organisation it was the last time the price of Brent crude was above $100 a barrel. Its return on average capital employed (ROACE) – the company’s preferred measure of operating performance – hit 12.1% in 2021 compared to 9.9% eight years ago.

The company has also moved on from the 2010 Gulf of Mexico disaster, reduced its debt and outlined a plan to reduce its exposure to oil and gas by boosting renewable energy output.

Still, at face value, the stock does not seem to reflect the company’s improving trading performance. Shares in BP are selling at a forward price/earnings (p/e) ratio of 4.9 according to Refinitiv broker estimates. Shares in Shell command a valuation of just 5.8.

These multiples also do not seem to be taking into account these companies’ plans to return more cash to investors. BP currently yields 4.3% while Shell supports a distribution of 3.8%. It is also expected to spend $12bn repurchasing its own shares, according to analysts at RBC and Bernstein. This was the biggest cash return in the sector until American oil giant ExxonMobil (NYSE: XOM) outlined plans to buy back a staggering $30bn worth of stock.

They’re making money today, but investors shouldn’t forget the fact that these two businesses jointly announced some of the largest losses in British corporate history in 2020 after the price of oil briefly turned negative. And these hefty losses forced both companies to reduce their shareholder payouts, underlining the fragile nature of oil company dividends.

A constant struggle to maintain output and maintain profits

Oil and gas producers face a constant struggle to maintain production. An oil well requires continual investment to maintain production, and sooner or later, the well will run dry. BP and its peers are always looking for new prospects and this costs huge amounts of money.

According to equity analysts at Bernstein, BP has spent about $87bn on oil and gas and green projects since 2016. That’s compared to operating cash flows over the same period of $113bn. Without the surge in oil prices last year, the group would have struggled to cover its capital spending plans.

These figures illustrate the biggest issue these operators face: the need to keep investing and keep spending even if oil prices collapse.

BP and its peers are also having to invest large sums of money in developing green energy projects. These projects are not going to produce returns immediately, and could prove to be a drag on profits for years to come, only adding to the uncertainty for these enterprises.

As such, while shares in Shell and BP do look cheap at first glance, investors need to carefully consider where these businesses are heading and the challenges they may face going forward. Windfall oil profits may only be temporary, while capital spending obligations are forever. Investors need to consider the risks of both before adding these stocks to their portfolio.

SEE ALSO

• What is a windfall tax?

• BP’s profits surge, but the company’s growth is far from guaranteed

• Is the oil market heading for a supply glut?

There’s a hurricane “right out there down the road coming our way”, JPMorgan Chase’s chief executive Jamie Dimon told a conference last week. “We just don’t know if it’s a minor one or Superstorm Sandy [which caused $65bn of damage in the US in 2012]… you better brace yourself.” Russia’s invasion of Ukraine means oil is likely to get much pricier, he said. Crude could hit $150-$175 per barrel.

Brent crude reached $120 a barrel this week, having risen more than 50% since the start of the year. The price spike came despite an announcement last week by producer group Opec+ that it would raise output by 648,000 barrels a day (bpd) in July and August, higher than the originally planned 432,000 bpd. The world consumes 100 million bpd of oil.

The decision shows that cartel lynchpin Saudi Arabia is finally responding to US pressure to increase production, say Derek Brower and David Sheppard in the Financial Times. The deal marks the end of a “two-year quota system that has helped oil prices rise almost 500% since the nadir of the pandemic crash”.

Yet the modest Opec+ increase is dwarfed by losses from sanctioned Russian crude, which could total three million bpd by the end of the year, according to the International Energy Agency. And pledges by Opec+ to raise output are all the less compelling because many members are struggling to fill existing quotas. The real increase will be much lower, at about 160,000 bpd in July and 170,000 bpd in August, reckon JPMorgan analysts.

Redrawing the map

Opec+ members together control 55% of global oil production, but the key players are Saudi Arabia and Russia, which together account for more than 20% of global output, say David Rundell and Michael Gfoeller in Barron’s. The pair’s strategic alliance is mutually beneficial, with both enjoying a significant windfall from high oil prices. That explains why Washington has had such a difficult time cajoling Riyadh into raising output.

“Russia’s attack on Ukraine is redrawing the world’s energy map,” say Christopher Matthews, Summer Said and Benoit Faucon in The Wall Street Journal. Energy markets are heading for a “more Balkanised” future, divided into a US-led bloc that won’t buy Russian fuel, an axis of emerging markets experimenting with alternatives to the dollar-denominated energy trade, and Middle East producers that stand to gain by selling to everyone.

But while Moscow is enjoying a windfall now, in the long term it will be forced to grant favourable terms to the few countries still willing to buy its energy, while Western technology sanctions will gradually degrade its ability to pump hydrocarbons, says Daniel Yergin of S&P Global. “Russia’s days as an energy superpower are over.”

SEE ALSO:

Britain’s broken energy markets

Which companies will lose the most from the energy windfall tax?

Why food and fuel subsidies will push up debt

The price of oil “whipsawed from a peak of $128 to as low as $98” in a fortnight as the market gyrated between Western sanctions on Russia, China’s Covid-19 surge and uncertainty about new supply from US shale drillers and Opec, says The Economist. Brent crude traded at around $119 a barrel on Wednesday, up by more than 50% this year.

The pullback from recent highs suggests some “speculative froth has blown off” the market, says Liam Halligan in The Daily Telegraph. But note also that “Western energy sanctions, while extremely serious, are not quite as tight as suggested by the belligerent political rhetoric”. It may be “the end of the year at the earliest” before Russian crude stops flowing to the UK and the EU.

Sanctions have caused shipping delays and disruption to global oil markets, says BCA Research. But by May ships will have been rerouted and China and India, keen to snap up Russian energy at a discount, will have put sanctions work-arounds in place. Western policymakers are putting pressure on Saudi Arabia and the United Arab Emirates to boost supply, but this is complicated by the fact that Saudi Arabia and Russia are “strategic partners”, says Daniel Yergin of IHS Markit. “Ever since the price collapse of 2014” Riyadh’s “goal had always been to bring Russia into a [supply] agreement” rather than have it “stand outside as a competitor”.

US shale producers may raise output, but Western oil producers are reluctant to invest. “The US has been looking for other sources of supply, including possible barrels from Venezuela, which has been under sanctions,” says Patti Domm for CNBC. A nuclear deal with Iran could bring one million barrels per day back onto markets, “but those talks have bogged down in recent weeks”.

Oil prices are racing towards $100 a barrel. Brent crude futures hit $96 a barrel early this week, the highest level in more than seven years. That reflected fears of an imminent Russian invasion of Ukraine, a risk that traders had largely ignored until now. “Russia produces ten million barrels of oil a day, roughly 10% of global demand,” says Clifford Krauss in The New York Times. A war, and resulting Western sanctions, could remove some of that supply from global markets.

This week’s jump shows traders starting to “price in a sizeable geopolitical risk premium” into oil prices, say Christopher Matthews and Collin Eaton in The Wall Street Journal. While Western governments are reluctant to sanction Russian energy, they may ultimately be forced to do so.

Demand exceeds supply

Oil markets were already tight. The Opec+ group of producers, which includes Saudi Arabia and Russia, is struggling to keep up with demand: it has been raising production quotas in response to a recovering global economy, but several members are pumping less than they planned. Total output was a record 747,000 barrels per day short of the collective quota in December, according to energy-research firm BloombergNEF.

A slew of recent outages in Nigeria, Ecuador, Libya and Kazakhstan is keeping a lid on global supply, says Radmilla Suleymanova for Al Jazeera. At the same time, the Covid-19 Omicron variant has also failed to dent the world’s appetite for petroleum as much as had been feared at the end of last year. The International Energy Agency thinks that global demand for oil will return to pre-pandemic levels – roughly 100 million barrels per day – by the end of the year, up from the current level of 97 million per day, says The Economist. Some are more bullish: Opec+ expects demand to reach 103 million barrels per day.

Raising forecasts

Wall Street analysts have started to forecast $100 or even $120 a barrel oil, but not everyone is convinced. If Ukraine tensions cool and Washington manages to do a deal with Iran about its nuclear programme – which could bring one million barrels per day back onto global markets – then prices could yet fall. “The real wild card is shale,” says the Economist. US investors are thought to have lost $300bn in the last boom-and-bust cycle, but higher prices are tempting some oil prospectors to try their luck again. Not for the first time, American shale drillers may yet come to the rescue.

High oil prices are ultimately “self-correcting” because they encourage higher output, says Jeremy Warner in The Daily Telegraph, “but they can do an awful lot of damage in the meantime”. Oil appears to be following natural gas higher: European gas prices hit the oil-price equivalent of $350 a barrel late last year and are still trading at the oil-price equivalent of around $160 a barrel. That has given power stations in the US and Japan an incentive to shift from burning gas to burning oil for electricity, raising demand for the latter. Could oil spike as high as gas, towards $300 a barrel? “Perhaps not that high, but something much higher than now is certainly plausible.”

Oil prices have risen over the last few months. Global demand is rebounding strongly, following the worst of the pandemic, and is expected to reach new highs later in 2022. The Organisation of the Petroleum Exporting Countries (Opec) cartel has been adding supply back into the market in a cautious fashion – its aim being to keep global oil reserves under control while achieving a price that satisfies the fiscal needs of its members.

Elsewhere in the world, a lack of investment in new oil supply is beginning to show up, with no major oil developments starting up this year. Natural gas has become front page news, with a perfect storm of supply and demand events driving European and Asian prices to record levels.

Rising oil and gas prices have created a positive backdrop for energy equities. The sector performed strongly in 2021, but valuations remain subdued relative to our long-term oil price and earnings expectations. In particular, we are seeing the emergence of much stronger free cash flow yields in the sector, a result of higher revenues and better spending discipline by the companies in question.

Our Guinness Global Energy fund invests worldwide in companies across the oil and gas sector. This includes the large integrated oil and gas majors, smaller and mid-sized oil producers, refiners, and pipeline and energy services companies.

BP: catching up with the market

In common with other oil and gas super-majors around the world, BP (LSE: BP) has lagged broader equity markets for several years. In addition to navigating a period of depressed commodity prices, the company has been dealing with the aftermath of the Gulf of Mexico oil spill in 2010. Today, BP has reshaped itself and now has one of the industry’s strongest pipelines of new oil and gas projects, has improved the profitability of its existing production assets, and is showing some leadership in its de-carbonisation strategy. The company’s dividend yield is currently just over 4%, but this has room to rise, since its free cashflow yield is expected to be over 10% this year.

Pioneer Natural Resources: higher oil prices, higher dividends

Pioneer Natural Resources (NYSE: PXD) is a US-based oil and gas producer, with a focus on shale oil production in the Permian Basin in Texas. We believe that the company owns one of the highest quality asset bases in the shale oil industry, with a deep inventory of undeveloped acreage. Pioneer is also demonstrating growing shareholder friendliness, shifting its ambitions away from production growth and towards higher shareholder returns. In particular, we like Pioneer’s recent adoption of a variable dividend structure, which returns excess profits to shareholders in sync with the oil price cycle.

Equinor: Nordic powerhouse

Equinor (Oslo: EQNR), previously known as Statoil, is Norway’s state-controlled energy major. The company has grown its oil production well over the past couple of years, thanks to the successful development of its Johan Sverdrup oil field. In addition, Equinor is responsible for supplying a high proportion of Europe’s natural gas imports, so it’s enjoying the benefit of higher prices. We expect Equinor to increase production this year, to help alleviate the worst of the gas price spike, but we still expect gas prices to settle at a level that supports strong earnings growth for the company in 2022.

Oil prices have hit a seven-year high amid fresh tensions in the Middle East. Houthi rebels in Yemen claimed responsibility for a drone attack on an oil storage site in Abu Dhabi that killed three people on Monday. Brent crude topped $88 a barrel on Tuesday and has risen 13% so far this year.

“The attack is another reminder of the highly complex missile and drone threat faced by the UAE and the region’s other main oil producers,” says Torbjorn Soltvedt of risk intelligence firm Verisk Maplecroft. “Over the coming weeks, we expect oil’s Middle East risk premium to come more sharply into focus.” Analysts at Goldman Sachs are now predicting that Brent crude will hit $100 a barrel in the third quarter of this year, says Matt Egan for CNN.

The bank forecasts that “oil inventories in advanced economies will sink to their lowest level since 2000” this summer. Previous price spikes have subsided after US shale producers ramped up production. However, while US shale reserves are “large and elastic”, reduced investor willingness to fund fossil fuels means it could take higher prices to bring shale supplies into play this time.

The US is pressing Saudi Arabia and its allies in the Opec+ cartel, which accounts for around half of global oil output, to raise production, says Stanley Reed in The New York Times. The group slashed output by ten million barrels a day at the beginning of the pandemic and is only slowly restoring production.

Libya, Angola and Nigeria are undershooting their output targets because of “political turmoil, outmoded regulatory regimes” and creaking infrastructure. Saudi Arabia, which accounts for about 10% of the global market, could produce more, but Riyadh is so far ignoring Washington’s pleas for help for fear of “busting up the arrangement with other producers”.

Kazakhstan’s “dominant” role in the uranium market is “akin to that of the Opec+ group in crude oil”, says Neil Hume in the Financial Times. So turmoil in the country has sent uranium prices up more than 8% in a week to $45.65 a pound. The country is the world’s leading supplier of the nuclear fuel, accounting for more than 40% of supply. Globally, utility companies use about 180 million pounds of uranium per year, but only 125 million pounds is being mined, partly due to “a lack of investment in new deposits”. For now, the shortfall is being made up with stockpiles and re-purposed “military warheads”.

Supplies are secure

Still, disruption and shortages are unlikely, says Lucas Mediavilla in L’Express. The Kazakh mines are located in an isolated region far from the violence and no stoppages have been reported. What’s more, Kazakh uranium extraction is done by injecting liquid into the ground (a method similar to that used in oil fracking), says Teva Meyer, a nuclear specialist at the University of Haute-Alsace. Unlike large open-cast mines, this creates a relatively small surface footprint that is easier to secure against threats.

The risk of shortages in the short term is “minimal”, agrees Étienne Goetz in Les Echos. Nuclear power plants maintain large stockpiles of uranium fuel (known as yellowcake). Changes in uranium spot prices will also not feed through directly into electricity costs because industrial users overwhelmingly meet their needs through long-term contracts at previously agreed rates.

A tighter market

However, uranium prices are historically volatile, says Charles Archer for IG, varying from as high as $136 a pound in 2007 to a low of $18 a pound in 2016. The fuel has been in the doldrums during the decade since the Fukushima nuclear disaster, but things are changing as governments push to decarbonise the economy. Nuclear, which currently accounts for 10% of global electricity production, avoids the problem of intermittent production that dogs many renewables. China plans to build “150 new nuclear reactors over the next 15 years”, a significant addition to the 440 currently operating globally.

The launch last year of the Sprott Physical Uranium Trust in Canada shook up this opaque market, says Emily Graffeo on Bloomberg. The fund has seen “explosive growth”, enabling it to buy “almost a third of the world’s annual supply” and helping push up uranium prices by more than 30% last year. It now plans to raise and invest $3.5bn (£2.6bn) in the next two years. Taking the corresponding amount of uranium off the market “could seriously jack up prices”, says Alex Hamer in Investors’ Chronicle. UK-listed Yellow Cake (Aim: YCA), which follows a similar strategy, should benefit.

Not so very long ago, it looked as though demand for oil might have peaked.

The price of Brent crude, the European benchmark, fell below $20 a barrel and the price of West Texas Intermediate, the US benchmark, briefly turned negative.

This of course was down to the pandemic. But some assumed that we might also be getting our first glimpse of a brave new future without fossil fuels.

Instead,some think we could be looking at $100 a barrel before the year ends...

Why has demand for oil risen so much?

The price of Brent crude oil is hovering at around three-year highs, and almost touched $87 a barrel earlier this week, while US crude has risen above $85 a barrel. Both benchmarks have risen by around 20% since the start of September.

As Roger Diwan, oil analyst at consultancy IHS Markit, points out in the Financial Times: “The market is gripped by fears – fear of stronger demand, fear of a rally contagion from gas and power, fear of missing out on the rally, and the fear to rule them all: supply anxiety.”

The global energy crunch has followed the resumption of economic activity, as mass vaccinations led to an easing of Covid-19 restrictions. On top of this, a shortage of both gas (which you can read about here) and of coal, particularly in countries such as India and China, has prompted a switch to using oil for power generation in certain areas.

Coal shortages have left many states in India facing electricity blackouts, while in China, power cuts have left millions of homes without electricity. Even before the outages, China was looking to reduce coal pollution ahead of February, when it will host the Winter Olympics. As a result, many factories are switching to diesel as a substitute, driving up prices.

It’s not just a rise in demand – supply is being squeezed, too. Earlier this month, the Organisation of Petroleum Exporting Countries and its allies (known as “Opec+”) opted against further increasing supply – it had already cut production by 9.7 million barrels of oil per day in response to the drop in demand caused by Covid-19 last year, and it said it would stick to its original plan of adding just 400,000 barrels per day in November. Some had hoped it would bow to pressure from India and the US and raise supply even more.

What does oil’s price rise tell us about oil demand peaking?

So what of the longer-term hopes of the energy transition, when we all drive electric cars powered by solar and wind, and oil is a thing of the past?

There is little agreement on when the demand for oil will peak. BP says it may already have peaked in 2019 – although in another scenario it says the peak may take place in 2035. Norwegian oil and gas producer Equinor sees the peak happening between 2027 and 2028.

But what the oil price is telling us is that whatever the forecasts say, the world needs oil right now. We’d all like to live in a world where the energy is provided entirely by renewables, but getting there will take time. Wind power is all well and good until the wind stops blowing, which is exactly what happened in the UK this year – lower wind power output has contributed to the surge in natural gas prices.

It is clear that at some point the world will no longer want oil, but until then it is hard to see how oil producers won’t enjoy a prolonged period of higher returns – so they may have extra cash to hand out to shareholders. So which stocks should you consider taking a look at?

One of the easiest ways to play the market for UK investors is to invest in the iShares Oil & Gas Exploration & Production UCITS ETF (LSE: SPOG). This ETF has shot up by almost 50% from its August lows.

In the US, the Motley Fool suggests investors look at ConocoPhillips (NYSE: COP) as it benefits from “scale and access to some of the lowest-cost oil on earth”. Another option is ExxonMobil (NYSE: XOM) which operates in every segment of the oil and gas industry. While the past decade has seen some lacklustre returns, the Motley Fool says the company's recent strategy to focus on its highest return assets and its ”more recent efforts to reduce its business costs and boost efficiency are beginning to pay off”.

We also took a look at oil services companies in a recent issue of MoneyWeek magazine, where deep value investor Andrew Hunt took us on a tour of the sector and pulled out some promising-looking prospects. If you haven’t already subscribed, you can get your first six issue – plus a copy of The Sceptical Investor, John’s book – absolutely free if you join now.

Energy prices continue to soar. Brent crude oil was trading above $82 a barrel this week, a three-year high, after the Opec+ group of producers said it would not add additional production in response to the price spike. US WTI futures are at a seven-year high. On Tuesday Dutch wholesale gas prices went above €100 per megawatt hour for the first time. Prices have more than doubled since the start of September.

There was much talk earlier this year of a coming supercycle: a prolonged period of rising commodity prices owing to structurally higher demand. Yet while energy markets boom, other commodities have come back down to earth, says William Watts on MarketWatch. US lumber futures gained 600% between April 2020 and May 2021 but are now down by 40% since the start of the year. Copper rocketed to an all-time high in May this year, but has gone nowhere in recent months. Still, in aggregate, commodities are up: the S&P GSCI index of 24 major raw materials has risen by 40% in 2021.

“Most elements of the supercycle story remain unchanged,” says CME Group on Benzinga.com. The recovery from the pandemic, combined with lavish fiscal and monetary stimulus, should continue to power prices higher. Yet the prospect of coming interest rate hikes and signs that China’s appetite for raw materials is ebbing are sowing doubt. “The jury is still out.”

Chaos, not a bull market

This year’s price movements look less like a supercycle than simple “chaos”, says The Economist. Stop-start lockdowns and geopolitical tensions are “interacting in unpredictable ways”. For example, “iron ore has cratered” on weaker Chinese steel demand. Yet coking coal, which is also used in steel production, is still “glowing hot” because of a lockdown in Mongolia, a major producer.

The energy transition is a key element of the case for a new supercycle. Plenty of copper and rare earth metals will be needed to build all the fuel cells and green power grids of the future, Steven Spencer of Spencer Associates tells Lexology.com. But more efficient use of raw materials can bring down demand over time. Higher prices also encourage users to switch to cheaper alternatives: witness “the use of aluminium power cables as a substitute for copper when the price of copper is too high”.

More efficient use of resources, combined with new exploration, means that commodities are a surprisingly poor long-term investment. Deutsche Bank’s Long-Term Asset Return Study notes that commodities have seen negative real returns of -0.8% per year over the last 100 years. Commodities should provide protection if inflation spikes. But think twice before buying them for your grandchildren’s trust fund.

Oil (as measured by WTI, the US benchmark) hit a seven-year high yesterday.

Brent crude oil (the European benchmark) meanwhile shot above $82 a barrel for the first time in three years.

Why the surge? And what does it mean for investors?

Opec is too disciplined for the market’s liking...

Oil cartel Opec-plus (that is, the usual Opec lot plus Russia) had a big meeting yesterday.

The oil price has been going up fairly strongly in the last year or so, but it’s been overshadowed somewhat by so many other commodities that it hasn’t really been drawing as much attention as it normally would.

However, now that we’re knee-deep in an energy crisis, when winter in the northern hemisphere hasn’t even begun, people are starting to pay attention.

Anyway, the oil cartel has been pretty disciplined in the post-Covid era. All the countries involved have been stung by collapsing oil prices and they’ve all been very wary of triggering another collapse.

Yet with prices rising at a solid clip and most of these nations quite keen to make more money, analysts and markets generally had expected yesterday’s meeting to end with a plan to increase crude production more significantly than they had already proposed.

But that’s not what we got. Instead, Opec said that it’ll stick to the current plan. That is, to only increase production by 400,000 barrels a day each month. That’s quite a gradual increase given that the global economy is opening back up again (in fits and starts).

Opec’s timing is really quite clever as well. The UN climate change talks are in Glasgow next month. For the next couple of months, politicians in developed markets are going to be competing with each other on who can pump out the greenest rhetoric. That’s going to make it quite tricky to publicly chide Opec for being stingy with what is, after all, a horrible dirty fuel of the past that we should all be glad to see the back of.

...and so are the US shale drillers

So what happens next? One assumption in the new era was that oil prices would be capped by US fracking. However, the problem there is that frackers have belatedly discovered price discipline.

There are some who have political interests in painting this as a “Joe Biden” issue. I have no idea how true that is – it might well be – but having seen how poorly Americans understand Brexit, I’m not going to bet that my Brit-centric grasp of US politics is any better.

And it doesn’t matter anyway. Scott Sheffield of Pioneer Natural Resources (the biggest shale operator) argues that “everybody’s going to be disciplined, regardless of whether it’s $75 Brent, $80 Brent, or $100 Brent… I don’t think the world can rely much on US shale. It’s really under Opec control.”

Shale companies are also having difficulty recruiting – particularly on the driver front (the shortage of truck drivers is global, despite what you may have read elsewhere). With operating costs rising they’re going to be even more wary about splashing the cash around.

Of course, Sheffield has an interest in talking things up and, whatever he says, there’s an oil price at which that “discipline” would break. But I don’t think we’re there yet.

So I can see oil prices continuing higher, particularly as the pressure increases on supplies of every other fossil fuel.

We’ve been suggesting you own oil majors since around March last year, and I see no reason to change that view now.

In the long run, are we going to move away from oil? Yes, of course. I hope so. If we don’t, it would suggest that humanity’s ability to innovate our way out of trouble really has reached some sort of peak.

However, that’s not going to happen overnight and in the meantime, a combination of ESG-mania and an over-reaction to last year’s negative oil prices has left the sector looking relatively cheap. And there aren’t many things that look cheap these days (no, not even after a couple of down-days on the S&P 500).

We’ll be discussing the energy transition and the best way to play it at the MoneyWeek Wealth Summit on 25 November. That’s a conversation I’m really looking forward to, I must admit – I’m keen to hear what our panellists have to say about it all. Make sure you don’t miss it – get your tickets here.

Yesterday, oil prices (as measured by Brent crude) raced past $80 barrel for the first time in three years. It’s the latest commodity of many to surge in value. West Texas Intermediate – WTI, the US benchmark – also hit a two-month high, at just above $76 a barrel.

So what’s going on and what do oil’s gains mean for you?

Why are oil prices rising?

As Reed Blakemore, deputy director of the Atlantic Council’s Global Energy Centre, tells Al Jazeera, the current “drama” in the market is due to a “collision of three massive forces: the impact of prolonged demand uncertainty due to Covid-19 on supply-side management over the past year; the structural changes of a policy-driven transition to a net-zero world; and the reality that sufficient investment and development of oil and gas supplies is still crucial to market stability even amidst a global energy transition”.

In other words, producers have struggled to match supply and demand in the short term due to lockdowns; while in the longer run, politicians are trying to swap us all to non-fossil fuels without really considering that we might need the old, mucky ones for a bit longer.

Most obviously, oil demand has rebounded sharply after its total collapse last year. In April 2020, Brent fell as low around $20 a barrel (hardly surprising when the whole world was locked up), while WTI (on some contracts) even turned negative briefly.

But positive news on vaccines and recovering higher economic activity following the easing of restrictions has seen the oil market to roar back to life. Brent is now up around 70% since the start of the year alone, while WTI is up more than 50%.

Another short-term factor is that the oil market is still reeling from the impact of Hurricane Ida which badly affected US supply last month. The fact that natural gas has gone through the roof is also having something of a knock-on effect to oil.

On top of all that, China specifically is enduring an energy shortage which is helping to underpin oil prices as it looks to cut down on pollution from coal in particular ahead of February, when it is due to host the Winter Olympics. As a result, many factories are switching to using diesel as an energy substitute.

Will oil prices remain this high?

In terms of supply, oil cartel Opec (plus Russia – known as Opec+) has just increased production. But oil prices have so far shrugged this off simply because it only matched increased demand – and as Goldman Sachs analysts point out, the impact of Hurricane Ida, which shuttered production capacity, offset the rise in oil production.

That’s likely to continue, even if supply is boosted further, reckons Barclays. "Opec+ tapering would not plug the oil supply gap through at least Q1 2022 as demand recovery is likely to continue to outpace this, due partly to limited capacity of some producers in the group to ramp up output".

Goldman Sachs now expects oil prices to level out around $90 a barrel by the end of the year, up from a previous estimate of $80. "While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts'.

Of course, investment banks are constantly making forecasts about the oil price, and these are often wrong – notably, eye-catching calls that predict a price well in advance of current prices have tended to signal tops in the past. But a forecast for $90 isn’t so exuberant as to fit into that category. And even if prices don’t rise much further, there is no obvious reason to expect oil to crash either.

What does it mean for markets and the economy?

Higher oil spells higher petrol prices for consumers. And oil is of course a huge cost for companies too. So this could both spur inflation (which is already at a nine-year high) and hit disposable incomes (unless wages rise faster than prices – in which case corporate margins may well take a hit). In other words, this adds to the stagflation risks.

As far as investing goes, the winners are pretty obvious. Oil and gas companies should do well if prices stay high. One way to play this is via the iShares Oil & Gas Exploration & Production UCITS ETF (LSE: SPOG). which has risen sharply from its pandemic low, but is still trading below its pre-pandemic levels.

Oil producers’ cartel Opec and its allies (together known as “Opec+”) have struck a much anticipated deal to increase oil production to take advantage of a sharp rise in oil prices this year – without adding so much to supplies that it craters the oil price again.

The group, which includes Saudi Arabia, Kuwait, Iraq, Russia and the United Arab Emirates (UAE), will raise oil production by 400,000 barrels per day from August, and by two million barrels per day by the end of the year.

The increased output will continue until the end of December 2022, extended from the original end date of April 2022.

Another key part of the agreement is that it allows for higher “production baselines” – measures used by countries to calculate how much their production should be cut by.

This is seen as a major victory for the UAE, which had argued that its previous baseline figure of 3.2 million barrels per day was too low. It was pushing for an increase to 3.8 million barrels.

Lower production baselines reflect lower output capabilities. The UAE wanted baseline production figures to be increased to reflect its higher output capabilities.

A disagreement between Saudi Arabia and UAE over these production baselines had been a significant sticking point in previous discussions and was part of the reason the Opec meeting was postponed earlier this month.

What does this mean for the oil industry?

Opec and its allies reached a historic output deal last April which led to a production cut of 9.7 million barrels in response to the sharp fall in oil demand caused by the Covid-19 pandemic.

The early days of the pandemic drove oil prices down to multi-year lows, with Brent crude crashing from $65 a barrel in February 2020 to just above $22 in April 2020. The price of US crude, West Texas Intermediate (WTI), even briefly turned negative.

There was scepticism as to whether countries would stick to their quotas (they often have not in the past). But with the exception of a few “laggard moments” from the likes of Iraq and Nigeria, most countries maintained a rare level of high compliance with the quotas, and some even over-cut production.

Partly as a result of this – but also as a result of economies opening back up – oil prices then reversed many of last year’s low prices and soared.

However, with the Opec+ agreement signed, the oil price slipped to its lowest level in a month this weekend.

What this means for investors

“The modest pace of output increases is a sign of lingering concern about the strength of the global recovery as Covid-19 variants continue to emerge,” according to the Financial Times. In other words, the oil cartel hasn’t let rip as much as it could have simply because it doesn’t want to flood the market with unwanted supply.

Countries including the UK have eased restrictions. But with the highly contagious Delta variant ripping across the world, there are lots of concerns that it could impede the recovery.

India is reporting significantly lower cases than during its deadly second wave, but the strain is still causing havoc across Asia, Europe and other countries, potentially derailing the reopening plans of many.

The increased production is bearish in the nearer term for oil prices as Covid-19 demand concerns coincide with a speculative market that has likely reached its peak, points out Jeffrey Halley, senior market analyst at OANDA.

But over the longer-term the agreement is likely to be bullish for the market as the agreement shows “Opec+ cohesion remains intact, without worries of a member's production free-for-all,” adds Halley.

On top of that, it’s worth noting that the other big factor in the oil supply – US fracking – is noticeably more subdued than it has been in past oil cycles. For now at least, as Bloomberg puts it, “American shale producers [are] favouring fiscal discipline over boosting output.” That’s good news for their shareholders but not necessarily good news for consumers who might be hoping for a lower oil price.

In the immediate term, the Delta variant and progress in tackling it is more likely to determine where oil prices go from here. But in the longer run, ongoing hostility to the extraction industries in the west, and ongoing discipline among Opec cartel members, suggests we’ve yet to see the highs for oil prices.

In March last year, oil cartel Opec+ “held a disastrous meeting in which it failed miserably to reach an agreement”, says John Authers on Bloomberg. Oil prices subsequently plunged. This month “Opec+ has held another disastrous meeting in which it failed miserably to reach an agreement”.

The result? Prices have risen. Brent crude oil prices have soared above $77 a barrel, the highest level since October 2018. US oil benchmark WTI briefly hit $76.98 a barrel, a seven-year high.

Saudi Arabia and the UAE fall out

The Opec+ cartel brings together major oil producers such as Saudi Arabia, Russia, Iraq and the United Arab Emirates (UAE). The group controls 50% of global oil output, and tries to keep prices stable. Opec+ found itself “staring into the abyss” last year, says Tom Holland of Gavekal Research.

A Saudi-Russian price war, combined with Covid-19 lockdowns, saw prices plunge. US futures briefly went below zero. To rescue the market, Opec+ members agreed to cut their joint output by ten million barrels per day (mbpd) compared with pre-pandemic levels (equivalent to roughly 10% of global production).

The group has since eased those curbs, but it is still pumping six mbpd less than it did pre-pandemic. The group had been expected to agree to further output hikes in the months ahead, but talks failed. Markets are betting that supply will thus remain tight and that prices could head towards $100 a barrel.

The quarrel came from an unexpected source. The UAE, traditionally a close ally of Saudi Arabia, has been resisting Saudi plans to keep some production curbs in place through to the end of next year. The UAE says it is only willing to agree if its own production quota can be raised. We have “sacrificed the most, making one-third of our production idle for two years”, energy minister Suhail Al Mazrouei told CNBC.

There is more to the dispute than money, says Al Jazeera. Riyadh and Abu Dhabi are at odds over foreign policy. Saudi economic pressure on Emirati free zones, “areas in which foreign companies can operate under light regulation”, is another bone of contention.

Opec is “sitting pretty”

Traders are getting carried away, says Holland. The two Gulf allies may “patch up their disagreement” before too long. With prices surging, other Opec members will also be more tempted to cheat on their agreements and pump extra oil on the sly.

Opec’s “purpose is to get as much money as it can for its oil”, adds Authers. Disharmony in the group should really mean cheaper oil. A more quarrelsome Opec means oil markets may be more volatile, but “it would be risky to bet… that this meeting” heralds much higher oil prices.

Don’t bet on a price plunge either though, says George Hay on Breakingviews. The market is likely to remain in deficit until the end of 2022 thanks to “surging crude consumption”. High prices are also not tempting US shale producers into the market as before: “Climate change and profitability concerns are deterring listed oil groups from ramping up output.” For all the “squabbling”, Opec is “sitting pretty”.

Oil prices jumped to a seven year high on Tuesday after the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec members delayed a crucial meeting which was meant to determine the future of oil prices in the months ahead.

The price of Brent crude oil jumped to $77.84 on Tuesday morning; the last time it was this high was the end of 2018. Meanwhile US oil prices – West Texas Intermediate – traded at seven-year highs.

Both benchmarks later gave up their gains.

So what’s going on? Here is a broad summary of the story so far.

Why is the Opec+ meeting delayed?

The Opec+ meeting scheduled to take place on Monday was delayed after the United Arab Emirates opposed a suggestion to extend production curbs for an additional eight months.

“The 18th Opec and non-Opec ministerial meeting has been called off”, Mohammad Sanusi Barkindo, Opec’s secretary general said in a statement.

As Tom Holland of Gavekal Research says, “members are bickering over how their baselines should be set in future”.

In other words, countries such as the United Arab Emirates argue that baseline production figures – measures used by countries to calculate how much their production should be cut by – must be raised to factor in higher output capabilities, according to the Financial Times.

What are the key sticking points?

UAE stresses its output of 3.2 million barrels per day, in place since April 2020, is too low. It believes the figure should be revised to 3.8 million barrels per day. Other countries insist this is unfair.

Opec+countries were pushing to increase production from 400,000 barrels per day from August to December.

“After days of tense discussions and plenty of infighting between Saudi Arabia and the United Arab Emirates, the group failed to agree to ease output curbs, instead abandoning the meeting,” says Sophie Griffiths, market analyst at OANDA.

Other than production baselines, there are also talks of extending last year’s historic agreement made by Opec and its allies for the whole of 2022 – which the UAE opposes.

The groups, which include some of the world’s richest oil producers, have not set a fresh date to resume talks. This is significant because it means the oil market faces much uncertainty on its future direction just as the market recovers from the Covid pandemic.

What agreement was in place throughout the pandemic?

This raises the question, how did oil markets fare during the pandemic, and what measures were put in place to protect the market from collapse?

Like several other asset classes, oil has seen plenty of volatility and wild price moves over the past several months. Brent crashed from around $65 a barrel last February to just above $22 a barrel last April, meanwhile West Texas Intermediate – the US benchmark– briefly turned negative.

This came despite Opec and its allies reaching a historic output deal last April which led to a production cut of 9.7 million barrels per day.

Oil prices turned jittery last year when Saudi Arabia and Russia engaged in a brutal price war even before the pandemic wreaked havoc in financial markets.

After the Opec+ agreement, most countries maintained a highly unusual level of compliance with the quotas throughout the pandemic, and some countries even cut production more than they needed to. Oil prices then staged a dramatic recovery; more so in recent months when economic activity began to resume across the world.

Opec’s current quotas are roughly six million barrels per day below baseline and the market reached a situation where demand has exceeded the production of oil causing a tight market.

“Today, the cartel’s members all agree that they should increase their quotas further, adding at least an additional two million barrels per day by the end of the year, bringing their output to a little less than four million barrels per day below baseline, and plugging much of the current supply deficit,” says Holland.

But the standoff between the UAE and Saudi Arabia shows this is far from simple.

What does the impasse mean for investors?

Much depends on whether an oil agreement is struck or not. The longer it takes to secure a deal, the more likely that prices will remain at multi-year highs.

After oil prices shot up on Tuesday, Brent had fallen back to below $75 by Wednesday morning, meaning markets look likely to expect an Opec agreement.

But failure to secure a deal could still support the market. While there have been concerns that the delta variant of the Covid-19 virus may dent demand for oil markets – especially given that India is the world’s third largest consumer of oil – it still appears that markets are very much focusing on reflation trade and the global economic recovery.

A bigger concern may be the eventual breakup of the Opec+ agreement; there is the possibility that “ Opec+ could fragment, with one or more major producers walking away in order to maximise production at the expense of remaining members”, Holland says.

Such a scenario could result in a very bearish market. As extreme as that scenario may seem, the standoff between Saudi Arabia and Russia last March shows such a possibility is far from unrealistic.

But more importantly for investors may be the price of Brent this year, as this may determine whether oil will cause inflationary pressures or not. Higher oil prices can increase costs to companies and generate inflation.

If Brent stalls at $80 this year, then its year-on-year increase will fall from 80% to 56%, and it will no longer be the culprit for higher headline inflation rates, Holland says.

“On the other hand, if Brent climbs to US$100 a barrel by the beginning of November, the year-on-year increase will more than double to 175%, contributing mightily to higher consumer inflation,” he adds.

Either way, the price of oil will keep all market watchers on their toes in coming months.

A slowing Indian economy is a new headwind for oil prices. The country is the world’s third-biggest oil market, importing more than $100bn of the fuel in 2019. Before Covid-19, world oil consumption was around 100 million barrels per day (mbpd). That figure tumbled by 8.7mbpd last year, according to data from the International Energy Agency (IEA). The IEA thinks global demand will recover by 5.7mbpd this year, says Robert Perkins of S&P Global. The agency has raised its forecasts because of strong rebounds in China and the US.

Oil prices have enjoyed a strong start to 2021, with Brent crude rising by about 27% so far to trade at $66 a barrel this week. That is thanks in large part to supply curbs agreed by the Opec+ cartel of producers, of which Saudi Arabia and Russia are the key members.

Opec+ has been curbing its output by millions of barrels a day in order to bolster prices. The stronger demand outlook had enabled the group to relax output curbs gradually, says Julian Lee on Bloomberg. The group had been planning to add an extra 2.14mbpd to global markets by July.

Now India could put a spanner in the works. With the streets of New Delhi and Mumbai falling “eerily quiet” once more, local diesel and petrol consumption looks poised to fall by as much as 20% month-on-month. Japan, the world’s fourth-biggest oil importer, has also declared a state of emergency in the face of rising Covid-19 cases.

Mobility data shows that the recovery in oil demand is “uneven”, say Martijn Rats and Amy Sergeant in a Morgan Stanley note. Strength in the US, the UK and Israel is offset by weakness in Europe, India and Brazil. Nevertheless, the investment bank still thinks that oil demand will pick up over the summer. Brent crude looks likely to trade in the $65-$70 a barrel range until the end of the year.

The price of a barrel of Brent crude oil spiked above $70 this morning, hitting its highest level in more than a year.

The move came in the wake of an attack on the world’s largest oil facility, Saudi Arabia’s Ras Tanura terminal. The terminal is capable of exporting around 6.5 million barrels of oil a day – that’s about 7% of global oil demand.

The drone attacks apparently didn’t do any significant damage, but oil prices are likely to remain high. And that’s because the high price of oil right now has very little to do with any threat to Saudi infrastructure.

Opec+ no longer fears competition from US shale oil

By the end of last week, before any attacks on Saudi terminals, the oil price was already heading much higher. Investors had been waiting for the latest meeting between the big Middle Eastern producers and Russia; they’d assumed that the so-called “Opec+” cartel would be unable to resist unleashing a bit more supply into the market at current prices. However, Opec’n’pals surprised everyone by sticking to their guns – Saudi Arabia would rather keep prices high at the moment. And it’s worth digging into why that is.

The biggest risk to big oil producers like Saudi Arabia is that high oil prices result in their own destruction. A high oil price encourages two things: the hunt for substitute sources of oil, such as shale; and the hunt for substitutes to oil itself, such as renewable energy.

Saudi Arabia knows or believes that the fossil fuel era is nearing its endgame. The hunt for sustainable and better renewable sources of energy is now entrenched. It can’t be derailed by hugely lower oil prices. So in the longer term, the best bet for a big oil producer just now is to diversify its economy (which the Saudis are attempting, though with mixed success) while trying to flog off its remaining oil for as much as possible.

However, competition from shale producers is a bigger issue for this strategy. Because in the recent past, when oil prices have gone high enough, shale has acted as a cap. That’s because shale companies have been desperate for cashflow. So even at unprofitable prices, they’ll keep pumping oil just to sell something for hard cash. And when prices go higher, they’ll pump as hard as they can to milk the profitable bit.

Saudi Arabia is now betting that this has changed. And it might well be a good bet, because shale producers – as eventually happens to all commodity producers in a bear market – are finally in that phase of the cycle where it’s not purely about what you can produce. It’s about what you can produce profitably, and about respect for shareholder capital.

The big players are consolidating the shale field now. And if you think that they want to pump barrels of oil at a loss, then you’ve got another think coming. They don’t have to do that. And once the land grab ends and the conservation of capital game begins, suddenly everyone is Opec.

The shale guys would be quite happy to see oil sustainably higher than it is now, especially given that competition within that area is now calming down. Everyone can make a profit as long as no one gets too greedy. That’s not going to upset them.

On top of that, Saudi Arabia has US president Joe Biden backing its hunches on this one. The president’s focus on “green” policies could make it tougher to develop shale fields and so it’ll be tougher to expand supply and so prices will go up. It’s another illustration of how regulation very often is exactly what any big incumbent player in a market wants. It keeps the competition at bay.

What this means for investors

So while this morning’s attack adds a spin to the story, the dynamics of the oil market had already shifted. It’s turning into a seller’s market. And this is happening at a time when the global economy is gradually getting back onto its feet.

From an investor’s point of view, this is just another facet of the re-opening trade and the “great rotation”. And it’s worth remembering that these things don’t move in straight lines. Oil has had quite a run now; it wouldn’t be a surprise to see it digest its gains for a bit.

But once these trends change, they can continue for quite some time. So if you’re a long-term investor, this is not a moment to worry about timing. Just be aware that this shift is happening and make sure that your portfolio has sufficient exposure to it.

At its simplest level, it’s a “sell the Nasdaq, buy the FTSE 100” trade. To be clear, that doesn’t mean you put 100% of your money in either. What it does mean is that if your focus has been on fast-growing popular stocks at the expense of boring old value stocks, then now is the time to take some of those profits and shift the emphasis back to the dull stuff.

We’ll be discussing this a lot more in forthcoming issues of MoneyWeek magazine. Get your first six issues, plus a beginner’s guide to bitcoin, absolutely free here.

Brent crude has gained 23% to around $64 a barrel this year. Its gains have already surpassed the most bullish of forecasts, says Avi Salzman for Barron’s. Bank of America thinks crude will hit $100 a barrel “from time to time” over the next five years. Before 2014 crude regularly traded above $100. That era ended when US shale drillers began to pour millions of new barrels onto global markets.

There are two key factors currently capping oil below $100 a barrel. First, energy cartel Opec and ally Russia are currently withholding about seven million barrels per day (mbpd) of production to prop up prices; economic recovery this year will cause them to turn on the taps and flood the market. Second, the green-energy transition means that some analysts think the world may already have passed peak oil demand. The energy transition is “real” and welcome, but things are moving “glacially”, says Dylan Grice on themarket.ch. Bloomberg projects that electric vehicles “will only make up around 8% of the total fleet of passenger cars by 2030... The oil market will continue to play a central role” for decades.

A serious price spike could finish off crude sooner than that, reckons Ambrose Evans-Pritchard in The Daily Telegraph. Low prices and the rise of environmental, social and governance (ESG) investing have sent investment in new oil capacity plummeting: annual non-Opec investment is running at just 35% of pre-2014 levels – far too little to meet global demand.

As demand picks up over the next five years, that could send prices going as high as $150 a barrel. Above $100, oil becomes pricier than already existing green alternatives, delivering the coup de grâce to oil and sending producers spiralling. Paradoxically, the “greatest threat to Saudi Arabia and Russia over the next five years is a roaring bull market for crude oil”.

These are torrid times for the oil industry. The price of a barrel of West Texas Intermediate, the benchmark US oil futures, has fallen from $60 at the start of the year to under $20, while even Brent crude is around $25. This is due to two factors: an increase in supply owing to the breakdown of the agreement between oil cartel Opec and Russia, and a collapse in demand as the world goes into lockdown.

The mismatch between supply and demand is now so great that there are reports of companies getting close to running out of space to store the excess oil. They may even end up paying some customers to take the oil off their hands.

Still, dire as conditions are, these prices are unlikely to last forever. While experts agree that demand for oil will be hit by most economies around the world being in recession, they also expect a relatively quick recovery once restrictions are lifted and activity starts to return to normal.

What’s more, the collapse in the oil price is already causing producers problems, especially relatively high-cost producers such as those involved in the American shale oil industry. And given that members of Opec depend on oil revenue to balance the books, they can’t afford for the oil price to remain at rock-bottom levels indefinitely.

The pick of the sector

As a result, some of the oil companies that have seen their shares fall to record lows now look attractive. One is Royal Dutch Shell (LSE: RDSA), which has slumped by almost 50%.

One reason for optimism, however, is that it has been working hard to cut the cost of production, so it will continue to make money if the oil price stays low; even its shale oil and gas holdings in the United States are set to break even at around $35 a barrel. Shell also has an interesting longer-term strategy of investing in renewable resources in order to offset the gradual decline of fossil fuels.

However, as with any energy company in this market, the stock’s most appealing feature is its valuation, with the company trading at a 40% discount to its net assets (compared with rival BP’s 20%) and only eight times estimated 2021 earnings.

Of course, the extreme volatility of the oil price means that you have to take these figures with a pinch of salt. Nevertheless, the fact that Royal Dutch Shell offers a yield of 11.6% is another big attraction, especially since it has said that it will suspend buybacks and reduce capital expenditure by around 20% to protect its dividend.

I suggest that you go long Shell at the current price of 1,300p at £2.50 per 1p (compared with IG Index’s minimum stake of £1). To avoid being stopped out in these extremely volatile markets, only to see Shell’s share price subsequently recover, I think you should opt for a wider stop-loss than usual at 650p, which gives you a total downside of £1,625.

Trading techniques... is a CEO’s death bullish?

What happens to a company when a CEO dies? The apparent suicide of Robert Maxwell in November 1991 preceded the bankruptcy of Maxwell Group by just a month. By contrast, the death of Steve Jobs, (widely regarded as the key factor behind Apple’s revival) in October 2011 didn’t prevent Apple’s shares from continuing to soar, allowing it to become one of the largest listed companies in the world (although technically Jobs had stepped down as CEO a few months before).

A 2016 study by Timothy Quigley and Robert Campbell of the University of Georgia, and Craig Crossland of the University of Notre Dame, looked at 240 unexpected deaths of CEOs between 1950 and 2009. The study found that the market reacted negatively to an unexpected death, with shares in the companies affected falling by an average of 0.92% the day after the announcement. But the variance of the reactions was relatively large and in many cases the share prices increased significantly, suggesting that the death was viewed as being positive for the firm. Moreover, a 2005 study by Louis Ederington of the University of Oklahoma and Jesus Salas of Lehigh University found that between 1983 and 2003 the death of either the CEO or the chairman produced slightly positive returns.

Stocks did better when someone who had founded the company died. This may be because founders tend to be major shareholders, so their death could increase the chance that the firm will become a takeover target (because founders tend to be reluctant to sell firms that they have created). If so, shareholders may get a premium for their shares.

How my tips have fared

As you’d expect, these past four weeks have been dismal for the six long positions that I tipped before the crisis, all of which plunged.

The good news is that in most cases stop-losses limited the carnage. This meant that Bausch Health Companies was closed out at $24, Volkswagen at €153, Taylor Wimpey at 130p, DS Smith at 300p, National Express at 353p and United Rentals at $117.

The upshot? My total losses on the closed positions were £4,340. International Consolidated Airlines Group, which I tipped a fortnight ago, has also fallen from 262p to 200p, a loss of £930.

However, the losses incurred on the long side have been balanced by the fact that the bear market has greatly increased the value of my short positions.

Indeed, if you had followed my advice a fortnight ago to take profits on the Wayfair short, you would have made £2,643. As far as the four remaining positions are concerned, Uber has declined from $33.38 to $27.28 and Boeing from $287.40 to $155. Shake Shack has slumped from $56.66 to $40 and PMI (Philip Morris International) has dwindled from $85.41 to $69.15. Overall, my current shorts are making a profit of £4,110.

The overall effect of the market turmoil has been to change the bias of my portfolio. While before the meltdown I had slightly more long positions than shorts, today there is a skew towards the short side.

To help balance the portfolio, I suggest that you take profits of £1,633 on Boeing, especially since it is perceived to be too big and too important to the US economy to fail.

This leaves Shake Shack, Uber and Philip Morris International as the three short positions, with International Consolidated Airlines Group and BP as the long positions.

“Now comes the oil shock,” says The Wall Street Journal. A “game of chicken between Riyadh and Moscow” has sent oil prices plunging and produced the worst day for many equity indices since 2008. Major oil producers led by the Saudis and the Russians, a grouping known as “Opec+”, have been cooperating to limit output and support crude prices since 2016. The Covid-19 demand slump saw Opec propose a new 1.5 million barrels per day (bpd) cut. That plan was rejected by Moscow, which has grown critical of an approach that it says only props up prices for US shale producers.

A nasty break-up

Rather than compromise, Riyadh retaliated. The Saudis slashed prices over the weekend in an all-out attempt to steal market share. The resulting “price war” could see the global market saturated with oil. Caroline Bain of Capital Economics predicts a “huge” global surplus of 3.2 million bpd in the second quarter.

The dramatic dissolution of the Opec+ alliance saw crude prices plunge by the most since the 1991 Gulf War on Monday. Brent crude fell 24% and is down almost 50% this year to trade at around $35 per barrel. US benchmark West Texas Intermediate had its second-worst day on record, losing 24.6%. Oil companies account for 10% of the UK equity market. The FTSE 100 had its worst day since the financial crisis on Monday, plunging 7.7%.

The International Energy Agency forecasts that demand will fall by 90,000 bpd this year, the first annual decline since 2009, says Andy Critchlow in The Daily Telegraph. Industry veterans fret that the “high-stakes game of roulette” between Moscow and Riyadh could see oil “tumble below $20” per barrel. The Saudis do not seem well-placed to win a price war: they need prices at $80 a barrel to balance their budget. Russia, with a more diversified economy, says it only needs $40.

The downsides of cheap oil

This high-stakes strategy is typical of Crown Prince Mohammed bin Salman, Saudi Arabia’s de facto leader, writes Julian Lee on Bloomberg. The prince wants to “drive oil prices down so far and so fast that Russia realises it made a terrible mistake”, but that is unlikely to work. As with the prince’s bloody intervention in Yemen, a supposedly short decisive blow could turn into a protracted conflict that does damage to all sides. The prince is “a risk taker... prone to impulsive decisions”, Greg Brew of Southern Methodist University told The New York Times.

Yet why is cheaper oil bad news? Historically, lower prices have been seen as a “net positive for global demand” as they boost consumer purchasing power and lower costs for businesses, says Jennifer McKeown of Capital Economics. Yet with coronavirus causing lockdowns and sowing fear, consumers are unlikely to rush out to spend. Oil-producing companies and nations are in for a serious budget squeeze. “What’s more, the price crash could put severe financial stress on the corporate bond market.”

Is the corporate credit bubble about to meet its pin?

The bill for America’s energy boom could now be due. Shale energy firms have borrowed billions of dollars over the past decade to finance the exploration and drilling of thousands of wells, says Ryan Dezember in The Wall Street Journal. In a world of ultra-low interest rates investors were delighted to snap up the higher yields on offer.

Moody’s Investors Service reports that North American oil and gas firms have $200bn in debt maturing over the next four years. And now slumping oil prices are sending jitters through the bond market. On Monday energy bonds issued by smaller operators traded so low that the market seemed to have concluded they were “already out of money”. Around 12% of the $936bn of debt issued by US oil and gas firms are trading at distressed levels, notes Joe Rennison in the Financial Times: their yield is more than 10% above that of US Treasuries.

This story is bigger than US energy, says Alexandra Scaggs in Barron’s. Energy bonds make up about 11% of the US high yield debt market. Energy sector ructions have prompted investors to pull a net $9.3bn from junk bond funds over the last two weeks. That is driving up borrowing costs for all junk bond issuers. The spread of financial contagion to the wider high-yield bond market looks “inevitable”, said Deutsche Bank in a note.

Firms grappling with record levels of corporate debt could now be hit by falling earnings caused by Covid-19 on the one hand and rising borrowing costs as bond markets take fright on the other. The OECD notes that BBB-rated bonds, one notch away from junk, made up 52% of all new investment-grade bond finance worldwide over the past three years, says Philip Aldrick in The Times. Junk bonds comprise another quarter of corporate debt. What’s more, the International Monetary Fund said late last year that the money owed by companies unable to cover interest payments with profits could hit 40% of the total in eight major economies if there is a downturn half as bad as the financial crisis.

In short, concludes Aldrick, we could be in trouble. US economist Hyman Minsky argued that a fall in one set of asset prices can act like a domino that knocks over “the whole debt-funded capitalist edifice”. Corporate debt could prove the “first domino.”

What oil’s plunge means for investors

The collapse in the oil price has wrought havoc on the share prices of oil companies everywhere – with double-digit drops in the share prices of FTSE 100 stalwarts BP and Royal Dutch Shell, and the spreads on US shale oil companies debt exploding higher. So what does it mean for your portfolio?

The first question is: will the oil price stay here, or perhaps fall further? This depends on several factors, none of which look especially promising for oil bulls. On the demand side, coronavirus will have a huge impact. The International Energy Agency reckons that global oil demand will fall this year for the first time since 2009. On the supply side, Saudi Arabia and Russia have flung the taps open, with Saudi upping the stakes even further mid-week, by saying it aims to pump 13 million barrels a day – a record level. The hope might be to put US shale producers out of business, but that will take time, especially if the US steps in to defend the sector. So in the short-to-medium term, it does look as though low prices are here to stay.

But what does this mean for oil producers? It’s certainly not good news, but on the other hand, oil producers were already being shunned by global markets. As a proportion of the S&P 500 for example, the energy sector has never before been this lowly valued. Part of that is scepticism over shale producers ever making any money (quite possibly justified) but some of it is arguably down to over-optimism on how rapidly we’ll replace fossil fuels with less polluting resources. So oil companies were dropping from low valuations.

The outlook for US shale producers looks too uncertain for our liking. But the oil majors look more interesting. As Rupert Hargreaves notes on Motley Fool, BP (LSE: BP) has a healthy balance sheet with low borrowing and plenty of scope for cutting spending if necessary. The majors have also demonstrated in past crises (such as the 2014 slump in the oil price) that maintaining their dividends is of utmost importance. With BP currently yielding more than 9%, that looks worth betting on. Shell (LSE: RDSB) has a higher breakeven cost of production but it’s also viewed as unlikely to cut its dividend.

Meanwhile, a slump in the oil price is unequivocally good for some sectors and countries – cheap petrol is good news for consumers and it’s very good news for the beleaguered travel industry in general. The difficulty is that low oil prices are unlikely to benefit the latter immediately – it’s still not clear just how badly damaged airlines and cruise companies will be by the slump. If you are feeling very brave you might want to consider a small dip into cruise giant Carnival (LSE: CCL). It’s currently yielding more than 9% – we wouldn’t bet on that being paid out, but given that the US government has been making noises about assisting the travel industry, it might be worth a bet.

The outgoing BP chief executive, Bob Dudley, about to retire after nearly a decade in charge of the oil giant, has delivered a “parting gift” to shareholders by unexpectedly increasing the company’s dividend, says Jillian Ambrose in The Guardian.

The decline in the oil price has reduced BP’s profits to $2.6bn in the fourth quarter of 2019 from $3.5bn in the same period of 2018. But the energy giant still did better than most people had been expecting. As a result, BP’s shares immediately surged by 3.5% on the news.

BP’s latest results may be “better than expected”, but the dividend increase is still surprising, says Emily Gosden in The Times. In October Brian Gilvary, BP’s chief financial officer, had said that a hike was “unlikely” before the new CEO took charge given the need to focus on debt reduction.

However, Gilvary now believes that a dividend increase can be justified given “strong operational momentum” and “growing free cash flow”. There has also been substantial progress on asset sales and debt reduction, with Gilvary announcing that BP plans to sell a further $5bn of assets by mid-2021.

Standing out from the competition

Increasing BP’s dividend makes sense given that high yields “are the only thing attracting many investors to the industry in a world increasingly aware of the impact of fossil fuels on climate change and falling energy prices”, says Laura Hurst on Bloomberg.

It also helps distinguish BP from its peers, who have experienced a “bleak earnings season” so far. However, pressure from fund managers means that no matter how well BP is doing financially, one of its key tasks now “will be to convince investors and the wider public that BP is doing enough to tackle climate change”.

If prices were $70 a barrel there would be plenty of financial leeway for new CEO Bernard Looney to satisfy activists by setting a “meaningful target” to reduce emissions and invest more in renewable energy, says George Hay on Breakingviews. As it is, he’ll have a hard enough task keeping shareholders on board, since the current price of $55 a barrel is not far off the $50 a barrel level needed by BP to cover its capital expenditure and dividends. Overall, while the dividend hike may be enough to secure Dudley’s legacy, it more than “slightly” cramps Looney’s style.

Further falls in the price of oil are certainly not out of the question, says Anjli Raval in the Financial Times. BP has admitted that if the deadly coronavirus outbreak continues to spread it could end up “cutting global oil demand growth by 40% this year”.

Perhaps the only way to halt the current bear market in oil is for Opec , the exporters’ cartel, to agree “emergency production” cuts with Russia that are drastic enough to bring prices back above $65 a barrel.

The oil price (as measured by the Brent crude benchmark) has risen by nearly 25% so far in 2019, well in advance of any developed-world stockmarket, as oil producers slash production in a "shock and awe strategy", said Goldman Sachs analysts. So far oil cartel Opec and the other big producer, Russia, have reduced output from 31.6 million barrels a day in December to 30.8 million in January. Meanwhile, Venezuela, another big producer, is in meltdown.

But the surge may not get a lot higher from here. Output cuts could be offset by rising US shale production. Last year, US oil producers experienced pipeline bottlenecks (with oil supplies outstripping the capacity to get it to market), but those should ease by the end of 2019. US output is already expected to surpass 24 million barrels a day over the next six years, according to Reuters. And there are signs that US output is set to rise further.

The latest rig count from energy services firm Baker Hughes shows that US energy firms have boosted the number of rigs drilling for oil to 857, from fewer than 800 a year ago, notes Henning Gloystein on Reuters.

Markets aren't ready for this surge in production, reckon Commerzbank analysts.US supplies are growing much faster than expected, yet this"is being completely ignored at present". As a result, "we view the current price rise as exaggerated and see growing correction potential".

Today we take a look at oil. It may be the most important fuel in the world, but, as far as the price is concerned, gravity has taken hold. It has, this past month or so, fallen off a cliff, as they say. And it continues to fall. From just shy of $87 a barrel at the beginning of October, Brent touched $58 on Friday, meaning it lost about a third of its value. It is currently sitting at $61. West Texas Intermediate (WTIC) did something similar, falling from $77 to $50 a barrel. It's currently sitting at $51.

One always likes to know why these kind of moves take place I often think the reason gets tacked on afterwards to make sense of the narrative. Nevertheless, the generally accepted reason for this current move boils down to perceived excess supply. A month ago there were fears that US sanctions on Iranian oil exports would mean a loss of something like a million barrels a day (bpd) to global supply. $100 oil was coming, they said. Then the US issued sanction waivers for eight countries importing Iranian crude. US production hit record highs the US now produces more oil than both Saudi Arabia and Russia. And, with stockmarkets, and thus economies, generally perceived to be weak, the forecast was that demand is going to tail off as well. In short, global markets are amply supplied.

US president Donald Trump, meanwhile, has taken the credit for the move, which is most unlike him, proclaiming: "So great that oil prices are falling (thank you President T). Add that, which is like a big Tax Cut, to our other good Economic news." To be fair, he had been having a go at oil cartel Opec over high oil prices for many months, and the sanction waiver does appear to have been a major trigger for the change in direction of the oil price. Lower prices were what he was gunning for. He is now urging Saudi Arabia not to cut its production, but it seems Saudi Arabia will, nevertheless, in an effort to stabilise prices, cut its own output by around 500,000 bpd, and urge other Opec nations to do the same.

How far will oil fall this time?

Oil seems to experience these violent sell-offs every few years. I still remember 2008 like it was yesterday. Oil had been in a bull market for nearly ten years that took it to almost $150 a barrel. Within six months, it gave back five years of gains and touched $36. 2014 saw another epic sell-off, now known as the Great Oil Bust. Brent had traded for around three and a half years, mostly in the $100 to $125 range. These kind of levels looked like the new normal. Then, not unlike now, president Barack Obama lifted US sanctions against Iran, US shale production surged and there was lower-than-expected global demand. Oil went from $115 to $45, bounced and eventually hit $27 a barrel in early 2016, an extraordinarily cheap number. Here are 15 years of Brent, so you can see the action.

In early 2016, I called buying oil "the trade of the lustrum" (a lustrum is a five-year period. It's an almost criminally underused word). Oil was $33 and our advice was to buy, hold and forget. Prices would go a lot higher, and they did. Our main vehicle for buying oil was not the usual suspects BP (LSE: BP) and Shell (LSE: RDSB), but BHP Billiton (LSE: BLT). Even though BHP is known for mining, oil is its biggest product and it tracks the oil price well better, bizarrely, than BP, Shell or the iShares oil and gas exploration and production ETF, (LSE: SPOG). BHP has actually held up very well in the face of this sell-off, currently sitting above 1,500p (we recommended it at 700p). BP, Shell and SPOG our other suggestions are now in downtrends.So the question now is, how far is the oil price going to fall?

I rather suspect this sell-off is going to be more like those of 2004, 2006 or 2012, rather than the monsters that were 2008 and 2014-15. That is just a feeling, by the way, a hunch it's not based on any detailed analysis of oil supply-and-demand statistics. But you do get a feel for the way a particular market trades the more you watch the price. I'm projecting Brent to make a low in the $45-$55 range. Thus I'm not sure this sell-off is quite done yet, although a bounce is probable. If Brent goes to $45 I think there is a real opportunity there and I'll almost certainly be looking to load up. Shell, at this point, is the one I really have my eye on, as well as BP. Dividends and all that. If they carry on declining and BHP holds, that is where the greater value might be. Short-term traders might even be eying BHP as a short, given the fact it has held up where others have fallen. Not for me that one, but I can see the argument.

As for the trade of the lustrum. This was a long-term trade with a five-year horizon. We are two and half years into it. Given oil went from $33 to over $80 there was a good argument to be taking profits up there. But if you sell now, will you be sure to buy back at lower prices? Will we even see lower prices? Questions, questions, questions. Buy, hold, forget was the strategy. So we stick with it.

Few expected last week's Opec meeting to amount to much. In the run-up, the oil exporters' cartel was at loggerheads, while Donald Trump was shouting from the sidelines. The president was berating Opec for cutting output and keeping oil prices and hence US petrol prices high; in the meantime, Iran, which accounts for 12% of the group's output, was strongly opposed to top producer Saudi Arabia's plan to raise production, largely because new US sanctions mean it will have trouble cashing in.

So the fact that the cartel "came together in the end" was seen as bullish for oil, says The Wall Street Journal's Spencer Jakab. Prices bounced, even though the upshot is that "a lot more crude is headed to market". Opec said it wanted to raise production by around 700,000 barrels per day (bpd); throw in a production boost from Russia, and the total output increase will probably be around one million barrels per day.

Output cuts mopped up the glut

Oil prices have surged by 160% since early 2016, when they dipped below $30 a barrel. Having flooded the market with oil in 2014 to bankrupt the emerging US shale industry, Opec abandoned that mission as shale producers cut costs and survived; sliding oil revenue was also hurting the cartel members. A deal with Russia to cut output and raise prices mopped up most of the glut and propelled Brent crude over $70. Now they want to "take the heat out of prices", says Liam Halligan in The Sunday Telegraph. Nobody wants a repeat of the oil spikes of the 1970s and 1980s, when high prices caused global downturns. They also want "to dent the profitability" of US shale drillers, to whom they have lost market share. The shale sector has expanded on the back of higher prices in the past two years. US output jumped by 6% in 2017, eclipsing 13 million bpd more than both Saudi Arabia and Russia.

Will prices now fall?

While more oil is on the way to market, a sudden reversal of the oil bull market is not on the cards. As Louis-Vincent Gave says in a Gavekal Research note, demand is rising by about 1.5 million bpd a year, which suggests it could soak up the Opec-Russia rise with room to spare. Furthermore, predicting Opec output is never an exact science and especially not now, as Venezuela's meltdown is badly damaging oil output. The extent to which US sanctions will remove Iranian crude from the market is also unclear.

Note too that while US shale drilling is becoming more efficient and cost-effective all the time, a lack of local pipeline capacity in a key oil-producing area, the Permian basin, will temporarily dampen production. Don't expect "the next surge in output" to reach the market before 2019, says Nick Butler in the Financial Times. However, at that point downward pressure on prices will mount. By 2023, according to one estimate, the US will be exporting four million bpd, soaking up the expected increase in demand. By that stage, Opec and Russia will be struggling to pre-empt another sharp price slide.

Raw-materials prices rose sharply in 2017, and they have made a strong start to 2018 too. The Bloomberg Commodity Spot index, a broad gauge of the sector, has jumped to its highest level since 2014, and the outlook remains favourable. Factories across the world are warning that they are struggling to keep up with demand now that the global economy is finally beginning to fire on all cylinders, says Fergal O' Brien on Bloomberg. Global growth could reach 4% in 2018, reckon analysts at JPMorgan Chase, while its worldwide composite gauge of manufacturing surveys is at its highest level since 2011.

On the supply side, oil and mining groups have cut spending to lower debt and return cash to shareholders; in the oil market, sentiment has turned more bullish now that the pact between oil-cartel Opec and Russia to cut output to mop up the glut appears to be holding. Oil, now nudging $70 a barrel for the first time in three years, is a large part of most commodity indices, reinforcing the growing confidence among commodities investors in general.

The usual cyclical lags are also playing a part, says Jon Yeomans in The Daily Telegraph. Chinese demand is pivotal for metals, and a clampdown on credit there in 2014 squeezed growth and dented miners' profits. Scarred by that experience, miners have cut back on exploration, so new supplies won't arrive quickly.

China is again trying to temper debt growth, so its appetite for raw materials will fall this year, while continued US growth could bolster the dollar, always a headwind for commodities as they're priced in dollars. But these factors are unlikely to outweigh robust global growth and tight supply, so the best guess is that the commodities upswing of the past 18 months will endure in 2018.

The quiet recovery in the oil price is a trend that hasn't been getting as much attention as it should, but it may offer a trading opportunity. Over a period of 18 months, from the summer of 2014 to the start of 2016, the price of Brent crude fell by more than two-thirds from $100/barrel to a low of $35 in January of last year. Since then it has staged a rebound. This hasn't always been smooth: it fell back in both the summer and then again in the late autumn. Nonetheless, there is a clear upward trend, and it now stands at around $55/bbl.

There are three reasons why I expect this will continue in the near future. One cause of the dramatic collapse in oil prices was the decision of Saudi Arabia essentially to abandon the quotas set by Opec, the oil producers' cartel, and keep pumping crude.

This was partly motivated by a desire to make shale oil production in the US uneconomic, but was primarily designed to hit Russia and Iran, two of its main rivals in the battle for control of Syria. But the use of the oil price as an economic weapon proved to be too expensive for Saudi Arabia, with the result that at the end of the year it agreed to cut production. This agreement seems to be holding.

At the same time the shale industry is still reeling from the drop in prices. While the numbers of rigs operating onshore in America has increased modestly from the 400 or so at work last summer, the rig count is still down around a quarter from where it was a year ago. It is also down 60% from the peak of around 2,000 three years ago. Lastly, while the oil majors are in a better financial position than they were at the start of 2016, they continue to cut exploration budgets to the bone, which again should limit global oil supply growth.

A further factor that might push up the price of crude oil is a fall in the value of the dollar. President-elect Donald Trump's plans for cutting taxes and increasing defence spending could send the dollar rally into reverse. Indeed, he recently stated that he felt that the dollar was too high and wanted to see it fall. Since crude oil is quoted in dollar terms, any fall in the value of the dollar could see the stated price rise even if there isn't any change in the underlying supply/demand balance.

Overall, this is a bullish set of drivers for crude. So for my inaugural trading idea in this new column, I'd suggest buying Brent crude, which trades at $55.43. I'd set a stop-loss at $48.50, the trend line that you'd get if you drew a line from the low in January 2016, and then connected it to the lowest price last November (see chart), and I'd take profits if the price hits $65. At £1 per $0.10, the minimum bet you can place with IG Index, this would mean a hypothetical downside of £693, and potential upside of £957.

Understanding stop-losses

One of the keys to trading and risk management is knowing when to take your losses and profits. The simplest method for doing this is to use stop-losses and limits. Stop-losses are an order to sell a share if it falls below a certain level (or rises above if you are betting against it). Limits are the level at which you want take profits. If you bought a share in Acme Widgets at 100p, with a stop-loss of 80p and a limit of 150p, you would sell if it fell to 80p or if it rose to 150p.

There are two special types of stop-losses. Guaranteed stop-losses protect you against the market "gapping": suddenly changing in price by a large amount without trading at an intermediate point. If Acme's shares suddenly gapped to 75p because of a profit warning, your position might be closed at 75p with a standard stop-loss, but would close at 80p if you used a guaranteed stop-loss. Spread-betting firms usually charge more for these, in the form of a higher spread (the difference between the bid price and the ask price) when you place your trade, but the added certainty can be valuable, especially for new traders.

Trailing stop-losses adjust in value as the price changes in your favour. Let's assume you set a trailing stop loss at 80p and Acme Widgets moves up to 125p. Your stop-loss would follow the price up and would be reset to 105p. If Acme then fell back, the stop-loss would remain at 105p and would be triggered if Acme dropped back below that price. Trailing stop-losses can help lock in profits in volatile markets, but they may also increase the risk of you being stopped out of a trade that would otherwise ultimately be profitable, especially if you are using tight stops.

Will firms flee the FCA's clampdown?

In December, the Financial Conduct Authority (FCA), the UK's financial services regulator, announced plans to clamp down on contracts for difference and similar products, including spread betting. The new rules would include plans to ban cash promotions and other incentives to attract new customers or encourage them to trade more frequently, but more significantly in terms of the impact on trading strategies they would strictly limit the amount of leverage that firms could offer their clients, especially for traders who didn't make frequent trades.

Other proposed regulations include a requirement to close out trades set by inexperienced traders once unrealised losses in their accounts reached a certain level (though these would not be guaranteed stop-losses see below meaning that clients could still lose larger amounts during periods of market volatility). The FCA even discussed bringing binary products under its regulatory umbrella. Currently these products are treated as a gambling product and run by the Gambling Commission.

The response has been a collapse in the prices of the major listed spread-betting companies, such as IG, CMC Markets and Plus500, which continue to trade at well below their previous levels. Many of these firms are reportedly now considering whether they should shift their base to other countries with less stringent regulations. Both CityAm and CNBC have reported that CMC Markets was considering moving to Germany, though CMC reportedly denied that it was planning to do this. While Germany has also announced new rules, these would only apply to betters who had a negative balance (ie, owed more than the value of their capital) and would still permit unlimited leverage. Meanwhile, the Daily Mail reports that FxPro has cancelled a planned stockmarket listing.

Saudi Arabia is hoping to break free from its dependence on oil. Can it do it? And what willthat mean for the rest of us and for the oil price? Matthew Partridge reports.

Over the past two years the oil market has beenturned upside down. By summer 2014 oil priceshad spent the best part of three and a half yearsabove $100 a barrel. Almost everyone analysts,economists, pundits, oil companies expected it tostay that way. Yet within just six months, prices hadhalved.

After a brief respite and recovery in early2015, a second slide saw both key oil benchmarks Brent and West Texas Intermediate (WTI) crashbelow $30 a barrel, levels not seen since 2004. Sincethe start of this year, prices have made anothercomeback. But can this rally last?

There are plenty offactors behind oil's slide from the glut of US shaleoil, to concerns over Chinese growth, to worriesabout rate hikes in America. But the biggest factoris arguably the actions of Saudi Arabia. The wealthyoil state says it is planning for a future beyond oil. Isthat possible? And what will that mean for oil?

This'll hurt you more than it hurts meSaudi Arabia has huge influence on the oil market.It accounts for around a fifth of the world's reserves,and its de-facto leadership of oil producers' cartelthe Organisation of Petroleum Exporting Countries(Opec) only increases its power. Between them, thecartel's 13 members account for around 40% of oilproduction and 80% of proven reserves.

However,as advances in "fracking" technology have unlockedUS shale oil, enabling America to become a topproducer too, Opec's grip on the market has slipped.After prices started to slide in 2014, most analystsassumed that Opec would slash production.

Instead,the Saudis raised output, against the wishes of manyfellow Opec members. It seemed odd, but it wasa simple recognition of reality the last thing theSaudis wanted to do was to cut down on their ownsupply and encourage America to boost productionfurther.

The decision has taken its toll on US shaleproducers, whose production costs are higher thanthe Saudis'. The number of crude oil rigs deployed inAmerica is down by more than two-thirds from itspeak, expansion plans have been mothballed, andseveral shale producers have gone bust (although theindustry endures as my colleague David Stevensonpoints out below).

But it's not just about staving off Western rivals.Saudi Arabia sees itself as the centre of both theMiddle East and the Muslim world. Iran stronglydisagrees. This conflict has its roots in the centuries-olddispute between two different branches of Islam(Saudi Arabia is mostly Sunni, Iran mostly Shia), buthas acquired a new urgency in the past five years, asa result of the "Arab spring".

Neither Iran nor SaudiArabia both highly authoritarian welcomed thepro-democracy protests that gripped the MiddleEast following the revolution in Tunisia in late 2010.But that didn't stop them from exploiting the chaosin order to advance their own interests, resulting in aproxy war between the two across the region.

In Syria, Saudi Arabia has supported Islamist rebelsagainst both Syrian dictator Bashar al-Assad, andthe moderate Syrian opposition. In response, Iranhas given Assad weapons and troops. In Yemen,Iran has backed the Houthi insurgency, which hasdriven the internationally recognised governmentfrom the former Yemeni capital, Sana'a.

In response,Saudi Arabia has bombed Houthi positions. So forSaudi Arabia, cheap oil is as much an economic weapon asa liability. Low prices might hurt Riyadh, but theSaudis hope that they will be more painful for Iran which has recently re-entered the oil market after theUS lifted sanctions against the country and alsoRussia, which is friendly to both Iran and Assad.

Saudi Arabia's game of thrones

A succession struggle has merely complicatedthings further. Last year, 80-year-old Salmanbin Abdulaziz Al Saud became king, giving himabsolute power. However, reports suggest hesuffers from dementia and struggles to carry outeven basic duties.

The official heir is the crownprince and interior security minister, Muhammadbin Nayef. However, analysts think he wants topass the crown to his son, the 30-year-old deputycrown prince, Mohammad bin Salman Al Saud(normally the crown passes from brother to brother).

Prince Mohammad, currently the Saudi defenceminister, is known for his aggressive anti-Iranian stance. Not only has he played a key role in SaudiArabia's Yemen campaign, but last month heoverruled the Saudi oil minister to veto a deal thatwould have seen Opec producers join Russia tofreeze production at January's levels. Why the veto?Because the deal didn't include Iran.

Meanwhile, afortnight ago, the prince outlined a dramatic neweconomic policy that would see Saudi Arabia slashwelfare spending, and end its "addiction to oil" bydiversifying the economy. Mohammed has evenpromised to float a small stake in state-owned oilgiant Aramco, and create a huge sovereign wealthfund. Most ominously for other oil producers, thereport pledges that the reforms will go ahead, evenif the oil price falls below $30, suggesting the Saudisare planning for prices to remain low.

Keep pumping oil to hang on to market share,while quickly diversifying away from a dependenceon the stuff. It sounds like a good plan on paper.But it's unlikely to work in reality, says geopoliticalanalyst John McCreary of KGS NightWatch. TheSaudis have been talking about diversification fornearly two decades now, but have made little orno progress. In 2005 the creation of a $100bn city,which was meant to turn the kingdom into a centreof finance and manufacturing, was announced.

Last year, the Saudigovernment admitted thatthe project would take afurther two decades tocomplete, if it ever gets offthe ground at all. One keyissue is Saudi Arabia's harshreligious laws. To becomean attractive destination forfinance and non-religioustourism industries thecountry is keen to encourage these would have to betoned down substantially. Butthat would mean confrontingthe powerful religiousestablishment, and that'sunlikely to happen.

For thelast four decades or so theregime has operated underan implicit agreement, wherebyit adheres to a harsh interpretation of Islamic lawsin exchange for the religious authorities supportingthe absolute monarchy and opposing anything thatwould diminish its power.

Easier said than done

So diversification is easier said than done. Andthe fact is that for all the bravado, cheap oil isplaying havoc with the Saudi economy. Oil revenuesaccount for 90% of government revenue, so fallingprices have caused the deficit (the gap betweenannual income and spending) to explode to $98bn,equivalent to 15% of GDP.

The war in Yemen isalso proving expensive. As for cutting spending as many other, more stable nations have learned,budget cuts look good in theory, but getting thempast a hostile population is a different matter. SaudiArabiafaces potential unrest from both its Shia minorityand its youthful population, meaning that anyattempts at austerity are likely to spark popularprotest.

Tentative efforts towards modest tax risesand subsidy cuts have already proved extremelyunpopular. The financial situation is so unhealthythat credit-ratings agenciesrecently downgraded Saudibonds, while the internationalMonetary Fund warns thatSaudi Arabia could conceivably runout of financial assets withinfive years. One sign of justhow hard cheap oil is hittingSaudi Arabia comes fromthe construction business.

The Saudi Binladin Group,the largest builder in the country,fired around a quarter of itsworkforce 50,000 workers.The staff were mostlyexpatriates from Asia,and the Binladin Groupclaims they were paid offin full, but there have beenprotests nevertheless, someof them violent.

Finally, Saudi Arabia's policy ofpushing down prices is alienating its Arab allies,including those in the Gulf. So despite the failureof the most recent Opec talks, there are plentyof reasons to think that Saudi Arabia couldcompromise in the near future.

Indeed, as ThomasPugh of Capital Economics points out, the Saudiswere among the first to raise the possibility offreezing output in the first place, so a completeIranian freeze may not be the stumbling block mostassume instead, a smaller increase from Tehranmay be a possible compromise.

So how high could prices rise if Saudi Arabia does agree tocuts? Most economists agree that the governmentneeds prices to rise to around $100 a barrel toenable it to balance the budget. US shale oil meansthat seems highly unlikely to happen.

However, it'splausible that we could see prices rise to around $60-$65, the level at which the majority of the US shaleindustry becomes viable again. Capital Economicsexpects a medium term price of $60 a barrel. Welook at the best ways to play the oil market rebound below.

The best bets in the sector

If you're looking for a direct "long" bet on oil, then an exchange-traded commodity fund such as ETFS Commodity Securities Crude Oil (LSE: CRUD) is one option. It is linked to the Bloomberg WTI index (so should rise or fall with the oil price) and has a total expense ratio of 0.49%.

However, direct bets on commodity prices are little more than speculation. A better strategy is to invest in beaten-down oil stocks. Royal Dutch Shell (LSE: RDSA) looks the most attractive of the UK oil majors. Shell refused to hedge its production when prices tumbled, but that means it stands to benefit all the more if prices continue to recover.

Meanwhile, the company has slashed both capital spending and operating expenses. It trades at 13.7 times 2017 earnings, and should be able to maintain its dividend at the current 7% yield. Rising prices should also help those explorers who can survive long enough to take advantage of the rebound.

James McKeigue notes that there has been a lot of interest in the gas and oil deposits in the Vaca Muerta deposit in Argentina, helped by government subsidies and heavy investment from international oil companies. One way to play this is via Andes Energia (LSE: AEN), though be aware that the company is not making any profits yet, so it's a high-risk trade.

Finally, there's state-owned Brazilian producer Petroleo Brasileiro (NYSE: PBR), aka Petrobras. Petrobras is a really risky play, due to the various corruption scandals surrounding the company and Brazil.

However, we expect theimpeachment of Brazilian presidentDilma Rousseff to act as a catalyst for ahost of business-friendly reforms, amongwhich is likely to be reform of Petrobras.This should enable the company to cutcosts and debt. At the moment it tradesat 6.7 times 2017 earnings and nearly a50% discount to book value.

We're on the bottom now's the time to buy

Oil prices could fall again maybe towards $30 a barrel but I think we've seen the bottom, writes David Stevenson. Managers are now launching funds to take advantage. Guinness Asset Management is in the early stages of launching a new oil and gas closed-end fund, for example.

Guinness has experience in the sector with its Global Energy Fund, but now it has recruited two exploration and production (E&P) experts from investment house M&G Sachin Oza and Stephen Williams. The pair's new fund will focus on smaller, listed E&P stocks.

The fund is built on an assessment of the top ten basins for oil and gas globally, and will have a strong African and Latin American flavour. The portfolio will contain around 30 stocks, and the managers will then try constructively to engage with the businesses, to encourage consolidation. You'll need at least $100,000 to invest in it in the first instance, though it might become more widely available later.

If you like the idea but don't quite have the capital to hand, there's Riverstone Energy (LSE: RSE), which I own myself. Riverstone takes a private-equity approach to North America-based E&P businesses, as well as midstream sectors, and aims to back management teams with proven records.

Everything seems to be going to plan, judging by the most recent results, and the shares haven't been hit as hard as those of most E&P firms. Numis reckons it's currently trading at a discount of around 26% to net asset value (on a share price of 815p).

Riverstone focuses on big North American shale deposits. If Riverstone is right, then Saudi Arabia's plan of sabotaging the unconventional oil and gas boom hasn't worked. There's been plenty of pain, but these huge reserves remain in business.

That would be terrible news for mostOpec members, who've endured terriblefinancial stress backing a plan that hasn'teven achieved its key objective. The goodnews potentially is that Riverstoneis still sitting on a fair amount of cash,which it can use to cherry-pick distressedassets just 77% of its total funding of$1.3bn has been invested to date.

The bad news is that some of thosedistressed assets might actually besitting on its balance sheet it takes awhile for bad private-equity decisions towork their way into the share price,so it's almost impossible to work outwhether Riverstone has a collection ofprized assets, or overpriced stinkers.

Given the expertise of management andits past success, I suspect the former.So if you're playing a big rebound in oilrelatedequities, what better way than toinvest via a fund with a chunky discountto net asset value, core North Americanassets and a pot of money to buy dirt-cheapassets?

Last week gold dropped $46.80, which is a decline of -5.6%. That drop seems fairly large, but let's step back to get some perspective.

It is interesting to note that in the 79 weeks since reaching its high in May 2006, there have now been five weeks in which gold has lost 5% or more, which is 6.3% of the time. So a 5% decline in one week is not new.

More importantly, it is reassuring to note that gold eventually overcame the four previous declines of 5% or more. In other words, last week's decline came after gold had already made a new 27-year high. Recovering from sharp short-term corrections is a clear sign that gold is still in a bull market.

The following chart remains bullish. Consequently, once this current correction ends, I expect gold will climb higher.

Gold is in a clear uptrend, so stay with this major trend.

Last week silver retraced the previous week's break-out from the pennant consolidation pattern it had been forming since last year. Despite this setback, the silver chart remains bullish too.

When a correction occurs, it is always prudent to see if anything meaningful has changed. Did any of the factors driving the precious metals higher for the past several years suddenly disappear in the past week? No, nothing has changed. If anything, there is now another reason to own gold. OPEC has inadvertently made clear their internal disagreement about continuing to accept dollars in payment for their oil exports.

Late Friday afternoon - after the gold market had already closed - Bloomberg and other news services reported the discussions of a meeting of OPEC ministers intended to be held behind closed doors but accidentally broadcast on closed-circuit television to reporters in the media room.

According to Bloomberg: 'Saudi Arabia, the world's largest crude oil exporter, rejected a proposal by Iran and Venezuela to discuss the weak dollar at this weekend's OPEC summit in Riyadh, saying it didn't want the U.S. currency to 'collapse.''

A Reuters article published by the Guardian in the UK quotes Price Saud al-Faisal Saudi Arabia's foreign minister as follows: 'My fear is that any mention that OPEC makes of studying the issue of the dollar, will in itself have an impact...Just indicating that we have charged finance ministers with studying this issue...would mean a decision taken by OPEC would have the opposite effect and the media would pick up on this point...And then perhaps we would find that the dollar had collapsed, instead of us having done something in the interest of our countries.'

Yahoo reproduced an AFP news report saying: 'Iran's Foreign Minister Manouchehr Mottaki said in a written proposal that a final declaration by OPEC leaders, who arrive here Saturday for a two-day summit, should express concern by member states over the fall of the US dollar. Reacting to the request...Prince Saud...warned that mentioning the falling dollar could lead to the 'collapse' of the US currency...Member states should express concern over 'the continued depreciation of the US dollar' in the final declaration, Mottaki said.'

The report on Yahoo went on to quote Prince Saud as saying: 'This is a sensitive issue. It will cause the dollar to drop further, thus complicating the problems we are facing from the dollar's fall.' After 30 minutes, someone became aware of the gaffe, and an OPEC official turned off the closed-circuit TV. Nevertheless we learned enough. We already know about central banks and savvy investors diversifying out of dollars, and we now know that OPEC is talking about it too.

If it wants a stable oil price, which is its stated aim, then OPEC should be pricing oil in terms of gold. This point is made clear in the following chart. When viewed in terms of gold, the price of oil has barely changed over the 62-years in this chart.

Here is how I explain the message of this chart in a recent interview with the Gulf Research Center, a privately-funded, non-partisan think tank in the Gulf region.

'With other [Gulf Cooperation Council] countries now reviewing their currency pegs to the dollar as Kuwait has done, they should be thinking about defining their currencies as a weight of gold rather than some basket of constantly inflating fiat national currencies. Linking to gold would bring a level of price stability to the region not available from linking to any basket of currencies.'

Oil was effectively priced in terms of gold until 1971 when the dollar was still on the gold standard, which explains the consistency in the red and blue lines on the above chart up to that date.

Will OPEC abandon the dollar and once again price its crude oil in terms of gold? There are clear reasons for doing so, which is another good reason why we should own gold.

James Turk is the Founder & Chairman of GoldMoney. He is the co-author of The Coming Collapse of the Dollar.