The price of Brent crude oil has started to creep back in recent weeks after falling as low as $45 per barrel. It was trading at around $60 at the time of going to press.
According to FE Analytics, Brent crude lost 53 per cent of its value between June 2014 and January 2015 but has started to gain ground. It is up nearly 20 per cent over the past month.
Performance of index in 2014
Source: FE Analytics
The fall in the oil price has been a contributing factor to the poor performance over this period of a number of stocks, and funds that invest in them, as they are widely interpreted by the market as a proxy for the price.
Sui Chung, managing director of Euromoney Indices, said: “The European energy sector has taken a hammering since oil prices started their sharp descent. The share price falls have been largely across the board, with Neste the only oil company to significantly buck the trend. However investors can’t just assume that sectors where oil is a large cost component will automatically benefit.”
If the bounce back were to continue, it is not unreasonable to expect energy stocks to improve in performance.
Russ Koesterich, BlackRock’s global chief investment strategist, says there are good prospects for certain stocks.
“We see particular opportunities in … the large integrated oil companies, which are starting to respond to rising oil prices,” he said.
“The catalysts: a further drop in the US oil rig count, which indicates supplies may tighten and push prices higher, as well as the GDP acceleration in Europe. We believe this signals some stabilisation in the global economy and, by extension, demand for oil.”
“With the recent surge in oil prices benefiting large, global companies, the S&P Global Energy Index is up roughly 13 per cent from its recent lows and is now positive year-to-date. We continue to see value in this segment of the market.”
Chris Beauchamp, senior market analyst at IG, says the likes of BP and Shell offer less volatility than smaller names, meaning the potential for lower losses but also lower gains. He also warns that the riskier stocks may have seen most of their bounce back.
“The post-results bounce seems to have run its course. Bigger oil groups like BP and Shell offer a greater margin of safety than exploration plays like Tullow, and this fact will continue to reassert itself now that results excitement has died away,” he explained.
However FTSE 100 is teetering on a 15-year high with traders bargain hunting in stocks such as Tullow Oil.
The beleaguered multinational oil and gas exploration company has lost significantly more than the two blue chip oil majors but has topped the list of best performers this week.
Funds have also been hammered by oil’s fall with the worst affected the £760m JPM Natural Resources managed by Neil Gregson.
Performance of funds and index over 1yr
Source: FE Analytics
The manager recently told FE Trustnet why he is expecting a turnaround in fortune for the fund.
“Despite the large falls in oil prices, we retain exposure to the highest quality exploration and production companies around the world. Half of this exposure is in North American unconventional producers with the lowest cost profile, the most promising acreage and the strongest balance sheets,” he said.
“We believe that the oil market will struggle to find an equilibrium over the short term because of excess supply, but that towards the end of 2015, markets will rebalance and prices will recover.”
“More generally, the sector is chronically under-owned and over-shorted. It will only take small incremental positive surprises to move stocks off these very low levels.”
JPM Natural Resources has a clean ongoing charges figure (OCF) of 1.68 per cent.
Investors could also get direct exposure via an oil exchange traded fund (ETF), which aims to mirror the oil price.
For example the Source S&P GSCI Brent Crude Oil Enhanced Total Return ETF, which is available to buy in the UK on several platforms, has closely tracked Brent’s falls. It has an OCF of 0.94 per cent.
Performance of fund and index over 1yr
Source: FE Analytics
The fall in oil has also bruised the broader stock markets of oil-rich countries such as Brazil and Nigeria, which are accessible via tracker funds such as the Imara Nigeria and the Pictet Brazil Index. Both are down more than a third since June 2014.
Imara Nigeria and Pictet Brazil have OCFs of 1.5 per cent and 0.68 per cent respectively.