How movements in the oil price could affect your portfolio
Garry White, chief investment commentator at Charles Stanley, looks at which areas of the market will be most affected if the situation in Syria deteriorates and there is a subsequent spike in the oil price.
By Garry White , Charles Stanley
Saturday September 14, 2013
Brent crude prices could spike to $160 a barrel should there be prolonged military action in Syria, Bank of America Merrill Lynch said last week.
The US broker accepted that such a major move in the oil price was unlikely, arguing that limited airstrikes were a more probable scenario, which it predicted would result in a price spike to between $115 and $120 a barrel. However, prices have eased this week as the prospect of a diplomatic solution to the current crisis was proposed by Moscow.
This week's fall has benefited companies that consume large quantities of fuel. These include airlines such as British Airways and Iberia owner International Airlines Group, as well as easyJet and Ryanair. Cruise operator Carnival also finds itself at the mercy of global oil prices.
Performance of stocks over 1 week
Source: FE Analytics
Such companies have been trying to cut their dependence on oil. Carnival revealed in its latest set of results that research and development of fuel-saving technologies had caused a 23 per cent fall in fuel consumption since 2005.
Both Ryanair and easyJet recently unveiled substantial orders for new aircraft. A significant proportion of these will be used to replace older, more fuel-inefficient aircraft to cut overall group fuel consumption.
So, aircraft manufacturers and their suppliers have been major beneficiaries of the high oil price. Suppliers include Rolls-Royce, which makes aircraft engines, and FTSE 250 engineer GKN, which makes parts used in the superstructure of aeroplanes.
Year-to-date performance of stocks
Source: FE Analytics
Obviously, the oil price is important for oil majors such as BP and Royal Dutch Shell, but it is a more complicated relationship than a "high oil prices are good" and "low oil prices are bad" situation.
High prices tend to lead to demand destruction, where companies and households cut back on usage as prices rise. This demand destruction effect can be seen in the response of airlines and Carnival to a period of prolonged high prices. However, if Shell is to meet its forecasted cash-flow targets over the next few years, it needs oil prices to stay close to $100 a barrel.
Energy-intensive manufacturers are also vulnerable to oil-price spikes, especially those in the FTSE 250. Plastic packaging manufacturer RPC Group used a substantial amount of oil-derived products to make its products, but such companies tend to have contractual agreements that movements in raw material prices will be passed on to customers. There is, however, a time lag in passing on these costs.
Events move fast in the oil industry and future pricing is difficult to predict. That is why oil futures markets are important for companies to hedge some of their position. It remains very difficult to determine the future direction of the oil price.
If the Syrian situation worsens and Iran closes the Strait of Hormuz in response, then Merrill's worst fears could be realised. About 40 per cent of the world's oil passes through this bottleneck and Iran has threatened to blockade it before.
However, a significant amount of oil supply for Libya is currently shut in. Strikes by employees at oil export terminals have caused exports to plunge to about 250,000 barrels a day (bpd), compared with exports under Colonel Gaddafi of about 1.2 million bpd. If this situation starts to be resolved, then supply fears could ease substantially.
Garry White is chief investment commentator at Charles Stanley. The views expressed here are his own.