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A slippery trade: Oil crisis shows bears right



LONDON (Reuters) – The recent slump in oil prices has proved right to some investors in their lack of confidence in energy stocks this year.

FILE PHOTO: A general overview of a drilling platform in the Norwegian Giant apron Johan Sverdrup near Stord, Western Norway, September 4, 201

7. REUTERS / Nerijus Adomaitis / File Photo

Commodity prices rose to a four-year high in early 2018, when tensions with Iran and OPEC supply cuts raised concern about a slowdown in global oil supply.

However, since October, the story has toppled as worries about a global trade war and rising US shale oil production rose and oil plunged to an annual low on Friday. Brent crude has dropped to $ 60 a barrel, after peaking at $ 85 in early October.

While oil companies have come a long way since the collapse in oil prices in 2014, their stocks are still vulnerable to movements in the underlying commodity – higher crude oil prices are leading to higher yields.

When prices rose at the beginning of the year, the big banks recommended that investors buy back into the sector. Many, especially in Europe, followed this advice.

But in the face of recent crashes, some sitting on the sidelines believe that their caution has been rewarded.

Kevin Gardiner, global investment strategist at Rothschild & Co Wealth Management, said he was glad to not have amassed the bullish oil trade after considering it.

"Just as the ink was drying in the bullish stories about the price of oil, we turned around and a sector that looked interesting now looks much less short term," Gardiner said.

"You have to be very careful about commodities because it's a market timing story," he added.

Investing in European oil stocks earlier this year would have been very lucrative – if you had the foresight to sell for the October summit.

That would have given a solid return of 15 percent, which is not felt in a global bear market.

In Europe, the energy sector is still the strongest this year. By 22 November, it had risen by 2.2 percent, with all other sectors except health services making a backlog.

The most important decision for investors is whether they can withstand the volatility of the sector.

"The collapse last month really scared the institutions," said Ashley Kelty, oil and gas analyst at Cantor Fitzgerald.

An oil tanker moored at sunset in front of the oil center of Fos-Lavera near Marseille (France) on October 5, 2017. REUTERS / Jean-Paul Pelissier

"Investors acknowledge that stocks are basically still OK, but it's trying to find a long-term value is very difficult, so many people will sit on their hands until the oil price stabilizes ,

The November Bank of America Merrill Lynch Fund Manager Survey showed that investors had cut their energy stock allocation by seven percentage points from the previous month, while European fund managers reduced their positions.

ETFs tracking energy indices experienced heavy outflows, returning assets under management back to April levels.

Chart: November 23 outflows from oil ETFs – tmsnrt.rs/2R86GeG

Energy stocks had already made significant gains in oil price gains over the past year as investors were wary of investors finding that the runaway Crude oil prices could fall slightly.

"When the oil price returned, most long-term institutions found that they were very underweight in oil, but were quite happy to abandon the first 20 to 25 percent of the rise before reentering, mainly because they returned. I was very careful that the oil could bounce down very quickly, "said Kelty.

While many predicted at the beginning of this year that the gap would close from below as oil stocks caught up with crude oil price gains, recent data shows that the gap is closing from the top and the crude is crumbling, which the bears call proves right.

Graphics: Do not pay attention to the gap – tmsnrt.rs/2QAabu9

Energy stocks are better positioned to withstand lower oil prices than in the past.

The world's leading oil companies, including Exxon Mobil ( XOM.N ), Royal Dutch Shell ( RDSa.AS ) and BP ( BP.L ) ) today are able to make gains in oil prices of around $ 50 a barrel and are committed to staying disciplined on spending, even though the outlook for oil prices was stronger.

"The cash flow improvements in the energy sector are generally still quite good," said Caroline Simmons, deputy head of UK investment practice UBS Wealth Management.

Oil price volatility is a problem not only for investors but also for the companies themselves, she added.

"What they want is the stability of the price of oil in order to decide on future investments. It does not matter what the level is, they just need stability, "she said.

BP is planning its long-term investment based on an average oil price of $ 50 to $ 65 a barrel, its chief Bob Dudley said in October.

Alastair Bishop, director and portfolio manager of the BlackRock Natural Resources team, which holds large holdings in the world's top five oil and gas companies, said it would not expect any increase in investment in the near future.

Graphic: Big Oil Cashflow – tmsnrt.rs/2Pn84xn

Coverage by Helen Reid and Ron Bousso; Editing by Jan Harvey

Our Standards: The Thomson Reuters Trust Principles.

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