Oil Surge Boosts Energy Stocks

Surging oil prices, boosted by the threat of conflict between the US and Iran, are helping world stock markets approach new records

26 June, 2019 | 12:41PM
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Strait of Hormuz tanker

Oil prices are on the rise again after a subdued spring, as hostility between the United States and Opec member Iran escalates.

The price of WTI crude climbed around 2% in a day to just below $59 per barrel. Prices are up around 10% so far in June but are not yet at year-to-date highs: the price of WTI crude soared from $45 in January to $65 in April as military action in Libya and economic chaos in Venezuela disrupted supplies. Falling US crude oil stocks have also helped support prices.

The trigger for this uptick in crude prices came when oil tankers in the Strait of Hormuz, through which a third of the world’s crude oil passes, were attacked on June 13. While the U.S. at the last minute pulled out of retaliatory air strikes on Iran, which it blamed for the attacks, the prospect of military action lingers. Hostile rhetoric between the two sides is keeping traders’ attention away from the U.S.-China trade war. Further sanctions imposed on Iran by the U.S. is restricting the Middle Eastern country’s oil exports, and makes it harder for other nations to trade with it. 

Stock markets are usually buoyed by rising oil prices, with energy companies making up a large percentage of world indices such as the FTSE 100 and S&P 500. As well as that, U.S. markets are already close to or at record highs as a softer dollar makes commodities such as oil and gold (seen as physical stores of wealth) more attractive to world investors.

UK oil stocks are feeling the benefits of the renewed rise in crude: Shell (RDSB), which has one of the largest weightings in the FTSE 100, is up 11% this year to £26.25, while BP (BP.) is up around 10% to 554p. Both companies are rated as four-star stocks by Morningstar analysts, which means they are trading below their values: in Shell’s case this is estimated to be £31 per share, and with BP it is 670p.

Analyst Allen Good says that Shell remains on Morningstar’s “best ideas” list for the listed oil sector.

With oil on the minds of investors, two FTSE firms in the sector, Tullow (TLW) and John Wood Group (WG), took the opportunity to update the market. Ahead of half-year results in July, FTSE 250-listed Tullow said it will be ramping up production to 100,000 barrels of oil per day, above a current output of just below 90,000 barrels.

Shares in fellow mid-cap stock John Wood Group rose nearly 5% to 438p after a strong rise in first-half profits, helped by a ramp-up in US energy infrastructure spending by the Trump administration. The Share Centre’s Helal Miah says the oil services firm is well-placed to benefit from increased spending in the sector, and boasts a dividend yield of around 6%.

Morningstar’s medium-term view is that the oil price is overvalued given the expected increase in U.S. shale oil production. Analysts believe the domestic oil industry can remain profitable at $55 per barrel for at least the next 10 years. They argue that after 2019, the oil market will be over-supplied and that oil cartel Opec will be forced into further production cuts to support prices. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC539.10 GBX3.67Rating
John Wood Group Plc140.00 GBX-0.36
Tullow Oil PLC37.78 GBX5.00

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