Why oil deserves a place in your portfolio
The commodity is seen by many as a short-term play on unrest in the Middle East, as well as a way of tapping into the longer-term structural growth story in emerging markets.
By Mark Smith, Reporter, FE Trustnet
Thursday April 05, 2012
Tensions in the global oil supply chain could see the oil price hit $200 a barrel, according to fund manager Angelos Damaskos.
Oil has been trading at inflated levels for some months now following increased tensions in the Middle East and North Africa, which began with protests in Tunisia in December 2010, and culminated in Iran threatening the West with an oil blockade.
While the price is already at record levels in sterling and euro terms, Angelos Damaskos, manager of the £49m MFM Junior Oils Trust, says that it could be pushed even higher if the situation were to escalate.
“If the supply going through the Straits of Hormuz is disrupted then approximately 16 per cent of the world’s daily oil consumption is at risk,” he said. “If this situation arises then we could see crazy prices of perhaps $200 a barrel.”
Furthermore, the manager says that even if the situation subsides, the overall trend for oil is likely to be upward as demand increases in the world’s burgeoning economies.
“We launched the Junior Oils Trust back in 2004 as we saw a new emerging super-cycle for energy and commodities as developing countries mobilised their labour forces,” he said. “It has been a growing trend since then and has many years to come of increasing demand for energy in that part of the world.”
Damaskos says that this trend will continue irrespective of the wider economic environment.
“Consumption in the US that stands at 24 barrels per capita today, China and India are estimated to consume about 6 barrels per capita per day.”
Data from FE Analytics shows that the Junior Oils Trust has returned 56 per cent over the last three years versus 42 per cent from its FTSE 350 Oil & Gas benchmark.
Performance of fund versus benchmark over 3-yrs
Source: FE Analytics
The Junior Oils Trust is focused on small and mid-cap oil companies.
“The reason is that the integrated majors such as BP and Shell invest more than half of their balance sheets in support services like storage, transportation, chemical processing, refining and distribution which are all activities which do not necessarily benefit from rises in the oil price,” said Demaskos.
“It is production which benefits from these rises because the cost base is relatively fixed so as the oil price rises the profitability expands. This can give a significant re-rating effect in the share price of smaller oil companies.”
Robert Love, research director at Asset Intelligence, says that the Junior Oils Trust is a good bet for investors with tolerance for high levels of volatility.
“It’s certainly a higher risk fund and in a niche area,” he said. “But the manager is very savvy and it is worth considering if you want to add an adventurous growth play to your portfolio.”