By Holly Black for the Daily Mail: PUBLISHED: 21:51, 17 March 2017
Oil stocks took a knock this week as the price of the black stuff slipped to its lowest level since November.
Despite an agreement to cut production by 1.2m barrels a day by the oil cartel Opec being widely adhered to, supply is still outpacing demand.
Now some experts are concerned the deal could be derailed by a surge in the US, where a 55 per cent year-on-year jump in active rigs has driven production levels to record highs.
And as US production increases and Opec’s falls, the cartel is losing market share.
Some are fearful this does not provide much incentive for the group – made up of major oil-producing nations – to maintain a production cut.
And if Opec abandons the strategy, the glut of oil on the market could see the price – currently about $50 a barrel – plunge once more.
Since 2008 it fell from $147 a barrel to $26 last year as Opec flooded the market to stave off competition from the shale industry.
But the move hammered profits, and in November the cartel agreed to cut production in a bid to shore up the price. But its efforts may be for nothing.
Richard Hulf, manager of the Artemis Global Energy fund, says: ‘What we are seeing at the moment is volatility because there is more supply than people expected. But I think that will soon start to ease off.’
Matthew Jennings, investment director of the Fidelity Specialist Situations fund, believes that despite the recent price falls, oil could reach $65 a barrel in the coming months.
This is because it is in Opec’s best interest to push oil prices higher. Saudi Arabia, for example, needs $75 a barrel to maintain profitability.
Any price rises are good news for the FTSE giants. It means the dividends of BP and Shell, for example, will look more secure.
Currently the pair yield 6.8 per cent and 7.1 per cent respectively, but there are worries that these payouts could be cut if the oil price plummets.
Some 6.7 per cent of Jennings’s £3billion fund is invested in Shell.
He says: ‘Shell is integrating assets it has acquired at the moment, which means it doesn’t have to spend money investing in new exploration to grow.’
But Hulf is still cautious. He is focusing on firms that aren’t solely reliant on oil. He says: ‘Oil will be important until about 2030, but we will start to see gas replacing it as a major fuel.
‘We like companies that have both oil and gas fields and can grow at a low cost.’
But even those firms which have a broader range of assets can be hit by a change in investor sentiment.
If fears mount that the oil price could revert then share prices can fall hard. This makes picking individual stocks to invest in very risky.
Russ Mould, investment director at AJ Bell, says: ‘A large proportion of the FTSE 100 is made up of oil and gas firms, so a relatively low-risk way to get exposure to the sector is simply to buy a tracker fund instead.’
The BlackRock UK 100 Equity Tracker has around 11.7 per cent of its portfolio in the energy sector and charges just 0.06 per cent a year.
Another option for investors is an equity income fund. These invest in blue-chip companies that pay a decent dividend, which means many hold oil giants.
The Schroder UK Alpha Income Fund has 11 per cent of its cash in BP and Shell, which has returned 14.7 per cent over the past year.
The two feature in the top holdings of the Royal London UK Equity Income Fund too. It has returned 19.9 per cent over the past year.