Don't rush in to oil stocks

If you’re thinking of buying oil stocks on the basis that the oil price will start to rise soon, you should perhaps think again, says Merryn Somerset Webb.

151118-oil

Oil companies may have to cut their dividends

Thinking of buying into oil producers and explorers on the basis that the oil price will surelystart to rise again in the very near future? Maybe don't.

I explained recently why the oil price is likely to stay lower for longer in this cycle than in most.The real story is high and rising supply, and that view is backed up by the fast rise in US inventories this week. They now stand at 487 million barrels. That's up from 385 million at the start of the year (already a lot) and a level not seen at this time of year for over 80 years, says Russ Mould of AJ Bell.

Demand for oil always rises when oil prices fall (note that in the US vehicle miles travelled over the past 12 months hit a record high of 3.1 trillion miles during August). But clearly it isn't rising anywhere fast enough to offset the fact that Saudi Arabia is caught in a nasty prisoner's dilemma' that forces it to keep pumping even as prices fall, and that US shale is becoming cheaper and cheaper to extract. Or, for that matter, the rising dollar (there is strong inverse correlation between the dollar and Brent Crude).

We usually say that the cure for falling oil prices is falling oil prices (in that low prices mean production cuts which mean higher prices). But that doesn't seem to be the case this time round.

So, rather than buying into oil at the moment, you might be better off devoting a little time to worrying about the dividend income you get from it either directly or via the income funds pretty much everyone is holding at the moment (they have been at the top of the brokers' most-popular lists for several years now).

As Mould notes, the oil companies account for some 13% of total amount of cash the UK's big companies are expected to distribute in 2016. What if they can't pay out? Quite.

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