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.


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).

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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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.