A modest role for oil
A weak year for crude has left my top pick for 2023 trailing, but the stock still has solid long-term potential
Two weeks ago, I said we should remove our oilsector investment from the MoneyWeek exchange traded fund portfolio. By the time this issue reaches you, there’s a risk that could look like rather poor timing. Missile attacks on shipping in the Red Sea (see page 10) are leading several firms to stop sending oil tankers and container ships through the area, which will mean longer journey times. Some analysts suggest that this will lead to higher prices for oil and other goods.
However, the response so far suggests that markets don’t believe that. Brent crude is trading at $78 per barrel, up a little since last week, but well down from almost $95 earlier this year. That makes sense: the oil market seems well-supplied, in part because US output has surged to a fresh record in recent months. That continues a trend that has helped the partial reduction in Russian supplies caused by sanctions (this is only partial because a lot of Russian oil is still being shipped to non-Western countries) and production cuts by Saudia Arabia to try to shore up prices.
So I remain content not having oil in the portfolio. We hold assets such as gold and US Treasuries that should do well in a geopolitical crisis. We might add it again if the chances of a price spike rose, but that doesn’t look so likely and we already hold gold and inflation-linked bonds to have some protection against inflation.
Neither bullish nor bearish
That said, I’m not especially bearish on oil – it simply doesn’t add so much in an asset allocation strategy right now. I still have a modest amount of oil in my wider portfolio, through the oil majors (BP and Shell). I bought enthusiastically when they used the cover of the pandemic to implement long-overdue dividend cuts and income-focused funds ditched them. Having been reset at a much lower level, dividends are recovering and they provide diversification for my large-cap portfolio, which otherwise tends to favour sectors such as consumer goods, pharmaceuticals and software.
This has worked well enough. If I were really bullish on oil prices, it would be better to hold the US majors, who are funnelling much more money into exploration and production and into buying other firms (and who frankly have better long-term share-price performance), but I’m not. My main bet that some fossil fuels will be around for a while is Woodside Energy (LSE: WDS), an Australian firm with a secondary London listing.
This was my tip for 2023 and as we set out our ideas for 2024 (see page 30), this is a good time to hold this one to account. Back then, the shares were just under 2,000p; today they are just above 1,600p. Not good – lower energy prices have held it back despite rising production. Yet natural gas will remain a key fuel for many years in the absence of some major breakthrough in alternative energy, and Woodside’s indevelopment liquefied natural gas (LNG) projects are well-placed to supply Asian markets such as Japan. A mooted merger with its Australian peer Santos may or may not be helpful (we will have to see the terms, if it happens), but I have been adding to my holding over the last few months.