Investec UK Special Situations, Invesco Perpetual UK Aggressive and JOHCM UK Equity Income are some of the well-known UK equity funds betting big that the recent rally in the price of oil will be sustained.
The dramatic fall in the price of Brent crude oil last year was one of the biggest financial stories of 2014, when after years of strength it plummeted more than 50 per cent to $42 per barrel.
According to FE Analytics, oil dropped 53.96 per cent between June 2014 and January 2015, a period of about six months between peak and trough.
Performance of oil June 2014 to January 2015
Source: FE Analytics
Many fund managers and commentators warned this was a dangerous trend that may well continue for several years, putting the ‘safe’ dividends of the likes of BP and Shell in danger.
However, the price of oil has rocketed up in recent weeks particularly in the past month. Oil is now trading just under $70 per barrel.
Performance of oil since 13 January 2015
Source: FE Analytics
Contrarian manager Alastair Mundy, who runs the £1.4bn Investec Special Situations fund, has 13.5 per cent of his portfolio in a combination of BP and Shell.
Co-managers of the £2.7bn JOHCM UK Equity Income fund James Lowen and Clive Beagles have about 12 per cent in BP and Shell while FE Alpha Manager Martin Walker, who runs the £240m Invesco Perpetual UK Aggressive fund, has more than 11 per cent in the two stocks.
However, the biggest bull on oil is Frederic Buzare, who heads up the £46m Candriam Equities fund. The manager has a whopping 17 per cent in the two stocks, almost triple the level the two companies represent in the FTSE All Share.
Since the oil price bounced back both Shell and BP have also seen their share prices re-rate, particularly for BP which is up more than 25 per cent.
Performance of equities since 14 January
Source: FE Analytics
Kames chief investment officer Stephen Jones says while the price of oil and other commodities look to be rallying this year, it appears in the case of oil to have hit a stable level that could appreciate further.
“The first three months [of the year] were dominated by vicious price swings, with some commodities such as oil experiencing near double-digit percentage moves on a daily basis,” he said.
“Now though, it would appear that oil has found something of a floor and investors appear only too keen to buy into this, judging by inflows into ETFs.”
“However, we remain sceptical. When you look through short-term factors for commodities, for example unrest in the Middle East and its impact on oil, analysis inevitably reverts back to supply and demand dynamics to dictate the price. A rampant US dollar, large build-ups of reserves and few signs of increasing demand mean commodities continue to be challenged.”
Jones adds that oil supply has increased substantially with the US Energy Information Administration recently noting that imports from OPEC to the US fell to their lowest level since 1987, at the same time as the country’s crude inventories have been setting a new record high every week so far this year.
Josh Mahony, analyst at IG, says this build-up is threatening another crash in the price of oil.
“Continued build-up of oil in the US has been threatening to derail this recent rally and the news that this has begun to fall shows that the depressed prices of late have finally made an impact upon suppliers in the US,” he said.
“This will be music to the ears of those at OPEC whose goal it is to price US producers out of the market. However, with the largest ever US stockpile still in place, the threat of another crash remains.”
FE Alpha Manager George Godber, who runs the CF Miton UK Value Opportunities and FP Miton Undervalued Asset’s funds, is also sceptical and warns these oil majors’ divdends are far from secure.
While Godber says the overall the FTSE 100 now expensive, many companies don’t have the financial stability to maintain their dividend at current levels and he is expecting more firms to slash their dividends in the coming months with the oil majors some of the most at risk.