Investing in oil can pay rich dividends

But firms face pressure over concerns on environment

ALL IT needs is a quick glance at an oil price chart to see the volatility over the last ten years: it’s been higher than $130 and lower than $30, and now trades at around $60 a barrel.

It is one of the key lights on the dashboard, flashing signals about the health of the global economy.

So last month’s warning by the Saudi crown prince, Mohammed bin Salman, that tensions in the Middle East would send the oil price to ‘unimaginably’ high levels, attracted attention.

As if to prove his point, crude ticked higher again yesterday after an Iranian-owned tanker was apparently hit by a missile in the Red Sea off Saudi Arabia’s coast.

This follows attacks on Saudi’s Khurais oilfield and Abqaiq processing facility last month, with Iran-aligned rebels claiming responsibility, although the US blamed Iran directly.

ThERE is reason for investors in Londonlisted stocks to be watching closely. Callum D’Ath, a divisional director of wealth manager Brewin Dolphin, says there is a clear correlation between the oil price and the shares of big energy-related companies listed in London.

Firms such as Royal Dutch Shell, BP, Tullow Oil – with its focus in Africa – and engineer Weir Group are bolstered by a higher price. But while a higher oil price can lift shares in these stocks, it can be very detrimental to the global economy, driving up the cost of everything from fuel to food.

The Saudi crown prince warned there would be a ‘total collapse’ of the world economy if oil supplies were disrupted by further attacks on Saudi oil facilities.

Luke Bosdet, driving organisation the AA’s fuel price spokesman, says: ‘Oil peaked at $147 a barrel in 2008, which helped to pitch the world into financial crisis.’

The oil price also peaked in the early 1990s, another period of recession. So alarm bells rang last month when it registered its biggest rise in 30 years after supply was reduced by the two attacks.

They knocked 5pc off global supply, but since Brent crude hit just over $69 a barrel in mid-September, it has come back down.

Bosdet points out the dynamics of the market have shifted in the past decade. The shale boom in the US has allowed it to become increasingly self-sufficient, producing enough to support the nation’s gas-guzzling car drivers.

That has helped offset the reliance of the world’s biggest economy on output from the 14-nation Organization of the Petroleum Exporting Countries (Opec), led by Saudi Arabia. Opec production is at its lowest level in eight years.

Bosdet watches the oil price for the impact it can have on the price of petrol on forecourts. he cites a rule of thumb that a $2 rise in the price of oil pushes up the price of petrol by 1p.

BUT, he says, there are other factors affecting prices at the pump, including gyrations in the pound and retailers’ profit margins.

The oil price certainly matters to Saudi Arabia for another reason: it is said to be planning to sell a stake in its giant Aramco oil company, claimed to be the world’s most profitable business.

As for existing oil shares, many of them are held for their dividends, points out Ian Forrest, investment research analyst at the Share Centre.

Shell and BP yield 6.3pc and 6.4pc respectively, which Forrest says is more than utilities such as National Grid and United Utilities. he believes both companies are committed to maintaining their dividends. Ben van Beurden, boss of Shell, recently told the Financial Times that the company wanted to preserve its dividend at the same time as trying to invest in non-fossil fuel areas.

But Forrest says that from an ‘investor’s point of view there’s no doubt that fossil fuels are going to make up a huge part of their revenues for many years to come.’

This could be a sticking point for those concerned about ethical and environmental issues.

The Royal Shakespeare Company last week severed ties with BP following complaints by green lobbyists, just days before BP named insider Bernard Looney, 49 to replace Bob Dudley as chief executive next March.

The Extinction Rebellion protests have drawn attention to climate change as a major issue for investors as well as everyone else.

D’Ath says that environmental considerations need to be high on the agenda. The move to electric cars – held back by cost, batterylife and availability of charging points – is a ‘long-term headwind’ for the oil price.

‘It’s difficult to know whether it’s ten years or 20 years. The risk is that it could happen much quicker than the market thinks,’ D’Ath says.