Oil Revisited
Author: Cathy Dixon, director Cunningham Coates
Once again we have seen the oil price moving upwards: it has recently broken out of its narrow range of $70 to $80 a barrel and touched $85. Once again we face the prospect of rising petrol and heating costs. There has been a great deal of speculation that there may be further rises in the pipeline, particularly after the Saudi oil minister hinted that they would do nothing to intervene this side of the $90 level. There have also been comments from Iran (the second largest OPEC producer) that the world economy is in a position to absorb an oil price of $100 a barrel. All this comes after OPEC’s upward revision of world oil demand estimates for both 2010 and 2011; another hint that the oil price is set to rise.
The oil sector is rarely out of the news and is one of the largest in the market. The big news that dominated for so many months was of course BP’s Gulf of Mexico oil spill, without doubt one of the worst ever environmental disasters, but one which was seized upon by US politicians to vilify the “British” company. As we now look back at the events which dominated the news for so long, the dust is starting to settle and while blame is being apportioned, it is far from clear what the eventual outcome will be for the oil giant. As it struggles to move beyond the whole sorry episode, we have seen third quarter results being unveiled in the last couple of weeks, which revealed a return to profitability. It has also seen an additional spill-related charge bringing the response cost to almost $40bn. BP has seen higher oil prices offsetting lower production as well as its disposal programme which has generated around $14bn. The crucial question for shareholders, however, is the reinstatement of the dividend, clarification of which is likely to be given when full-year results are announced in early 2011. The share price has also begun to creep up again, having plunged from 650p to under 300p and at the time of writing is around 445p.
Also in the news for rather different reasons is the Anglo-Dutch giant Royal Dutch Shell, which has announced its intention to offer an alternative to cash dividends by way of a share alternative. The picture is complicated by the fact that the company is offering A shares, which are euro-denominated and Dutch (although quoted on the London market). As this would result in a foreign holding, there is no income tax payable, leading to the possibility that the value of the scrip might exceed the cash alternative, depending on the shareholder’s tax position.
This large and important sector is patently full of risks and contrasts: the share price of Royal Dutch Shell has been hovering close to its all-time high, whereas BP is in an entirely different situation. Oil is a commodity that is likely to remain very much in demand both in developed and developing markets and for this reason this sector cannot be ignored.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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