How to profit from higher oil prices
The escalation of conflict in the Middle East sent the oil price soaring. Which investments could rise during periods of rising oil prices?
The price of oil briefly jumped back to over $100 per barrel on 12 March, pushing stock markets down once again.
Conflict in the Middle East has sent global stock markets tumbling since the beginning of March. With the critical Strait of Hormuz, through which around 20% of the world’s oil passes, effectively closed, the price of oil has skyrocketed.
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Given most of the world’s industry relies on oil and gas as inputs, this has caused chaos in most stock markets and economies. The Korea Exchange (KRX) had to implement a circuit breaker on 4 March as the country’s stocks shed 12% in a single day.
There appeared to be a reprieve on 10 March when Donald Trump declared the US’s operation “very complete, pretty much”. Brent Crude oil futures fell over 11% to $87.80 on the day.
But the following two days saw oil prices creep back up again as the conflict rolled on.
“The conflict is potentially a stagflationary shock the severity of which depends on its length and export volumes while the Strait of Hormuz remains closed,” said Daniel Casali, chief investment strategist at wealth manager Evelyn Partners. “Oil inventories buy time, but as they erode, risks of higher energy prices, rising inflation and market volatility increase.”
Brent Crude futures briefly rose above $100 on the morning of 12 March, though they remained well below the $119.50 they reached on 9 March.
Is there any way to profit from oil and energy price rises, and compensate for all the increased cost rising energy bills and petrol prices bring?
How are investors responding to rising oil prices?
Research from investment platform Charles Stanley Direct suggests that DIY investors’ top stock picks for March could reflect investors’ desire to invest in stocks that outperform during oil crises.
The analysis shows 40% of DIY investors are seeking to increase their portfolio’s exposure to oil, while 43% of DIY investors are hoping to increase their exposure to energy, following the outbreak of the conflict in the Middle East.
“Energy remains a cornerstone of the global economy, and when its cost jumps the effects spread quickly,” said Rob Morgan, chief investment analyst at Charles Stanley Direct.
Rising oil prices could, for example, push Ofgem’s energy price cap up by 10% in May.
“It’s no surprise that investors might wish to try to capture [increased oil and energy prices] in portfolios,” said Morgan.
The risks of investing in oil
Before going into how to invest in oil and energy, it is worth a reminder that, as recent events have proven, oil prices are highly volatile.
“Investing [in oil and energy] via an exchange-traded product (ETF) that aims to follow the price can risk being whipsawed,” said Morgan.
Morgan also cautioned that many investors might already have reasonable oil exposure within their portfolios, if (for example) they hold assets tracking the FTSE 100 which includes several oil majors like Shell (LON:SHEL) and BP (LON:BP.).
“It is important to avoid unwittingly doubling up on exposure,” said Morgan.
How to invest for higher oil prices
That said, it could make sense, depending on where else you are invested, to allocate a small part of your portfolio to focused oil investments in order to shield yourself from price shocks and the consequent inflation.
“Energy equities can protect a portfolio in certain inflationary scenarios but can also underperform for long stretches when the commodity cycle turns or policy shifts,” said Morgan. “This is why they should generally only be held in small quantities, for instance up to 5%.”
As well as holding oil price-friendly assets, it is also important to remain diversified.
“Diversification and explicit geopolitical hedges remain essential,” said Evelyn Partners’ Casali. “These include gold, hedge funds, inflation‑linked bonds, short‑duration sovereign bonds and energy equities.”
If you feel your portfolio could do with a barrel or two of extra oil price exposure, then there are several ways you can add it:
- Oil and energy stocks. You can invest in oil and energy stocks like Shell, BP or Harbour Energy (LON:HBR). These stocks gained 4.3%, 6.8% and 15.4% respectively between 27 February and 9 March, though all pulled back on 10 March once oil prices started to fall.
- ETFs. Opt for a fund or ETF that invests in oil and energy companies, offering diversified exposure to stocks like these. Some examples are the SPDR MSCI Europe Energy UCITS ETF (LON:ENGE), which tracks large- and medium-cap energy companies in Europe, and the iShares Oil and Gas Production UCITS ETF (LON:SPOG), which has a broader international footprint (nearly 74% of holdings are based in the US and Canada, with most of the rest hailing from Australia, Japan and Norway).
- ETCs. Use an exchange-traded commodity (ETC) as a means of simply tracking the oil price. One example is WisdomTree WTI Crude Oil (LON:CRUP), which offers investors total return exposure to WTI Crude Oil futures contracts.
