Oil glut damages returns

OIL investors who expected a quick re c o v e r y when the price of the black stuff halved earlier t his year could be disappointed, experts have warned.

A year ago the oil price – measured in dollars per barrel – stood at $105. Today it stands at $50. The price of oil is based on supply and demand.

Over the past six years US domestic energy production has more than doubled, lessening its need to buy oil elsewhere. Meanwhile, demand in struggling European and developing economies has been weaker, too, as countries use their reserves more efficiently.

Usually, i f supply outstrips demand the Organisation of the Petroleum Export Countries will cut production levels to help shore up the price.

But this time several oil produci ng countries have refused to reduce their output.

Some people have speculated that this move may be borne out of fear that quelling oil production would encourage users to move to shale gas instead.

On top of that, there is the belief that oil was in a bubble and the high price it sold at – as much as $140 in 2008 – was unjustified, so was always going to plummet.

Nevertheless, in February many speculated that it was a good time to pile into oil in the hope of making a fast buck.

But with supply still outstripping demand and a strong dollar diluting export profits, the odds of a rebound seem ever slimmer.

Darius McDermott, director at FundCalibre, says: ‘There aren’t a lot of positive things to say about oil at the moment. At best we can probably expect the price to stay around where it is, and the biggest threat is that it dips further.’

So does this mean i nvestors should sell any oil holdings they have? Experts largely expect the price to hover around its current marker, moving within the $40 to $65 range, for the time being.

Simply following the price of oil in a tracker fund could be a quick route to more losses, but a decent global energy or resources fund that has its money spread across the world may be well placed to make gains when things start to pick up.

McDermott likes Guinness Global Energy which invests in energy firms across the world. Around half of its investments are US firms such as Occidental Petroleum and Hess, but it also holds Aberdeenbased John Wood Group and Italian oil and gas company Eni.

He says: ‘The fund has one of the most experienced managers in this area and a good long-term track record. It’s had a dismal time of it lately, but if anyone can make money this manager can.’

Like all funds focusing on this asset, it’s having a tough time at the moment and has lost 32pc over the past year. In the two years before that it returned 12pc and 17pc respectively. The Baring Global Resources fund is down 13pc over the past year, and the Investec Global Energy fund 36pc.

Stephen Jones, chief investment officer at Kames Capital, says: ‘The oil price being in triple digits will soon be a distant memory.

‘The fundamentals remain the same – the number of rigs in the US is rising, there are new pipelines of supply set to come into production, and a lack of economic growth globally is dampening demand.

‘It’s not just oil, other metals such as iron ore are under pressure from an abundant supply too.

‘We are avoiding commodity and mining companies.’ And it’s not only investors struggling to make a profit out of oil at the moment, exploration and production firms are under real pressure with prices at current levels.

Duncan Goodwin, manager of the Baring Global Resources fund, says: ‘Many firms are already tryi ng to cut down on spending because they can’t afford to produce at current levels, and it is likely that they will soon reduce production too.

‘That would lead to a significant deficit in supply, which would cause the price to move up again.

‘We don’t expect that to happen until next year though – the next few months will be volatile.’