Comment: Raise glass of Irn Bru to oil price slide

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
Share this article
1
Have your say

OF ALL the upsets predicted for investors in the course of 2014, a 30 per cent plus plunge in the price of oil rarely featured as a big event risk. But here we are, with Brent crude slithering from a peak of $115 a barrel this summer to just above $70 last week.

Stock market winners? Travel companies from Ryanair to EasyJet and Stagecoach and FirstGroup are in the front line of beneficiaries. And so, too, are a number of unlikely companies – Irn Bru producer AG Barr among them. The real benefits, however, are more widely spread. The falling oil price works like a tax cut for countries that are net oil importers. Companies across the world are now enjoying a significant fall in production and distribution costs.

The problem for investors is how to react to such a plunge. By the time markets have adjusted it is too late for investors to undertake big portfolio changes. And in any event it pays to be cautious about instant reaction.

Last week’s plunge may well have been overdone. And it would be brave to assume prices will stay so low. Analysts at Goldman Sachs now predict an average price of $83.80 for 2015 – equivalent to a 23 per cent discount to the average price of Brent crude over the past three years. But one effect of the price fall will be to cut oil exploration and extraction activity – putting in place the market dynamics for a price recovery.

For the moment, let’s enjoy the benefits. IMF economists reckon that a 10 per cent change in oil prices is associated with a 0.2 per cent change in global GDP. That may seem so diffuse as not to matter. But coming as it does amid recent talk of a slowdown in global growth, this should provide a welcome tonic.

One immediate consequence will be to further reduce inflation pressures and enable central banks to keep interest rates lower for longer.

In the company sector, shares in oil giants such as BP and Shell have tumbled, dragging the FTSE-100 Index down with them. UK oil and gas shares have declined 15 per cent on average in the past three months. Oil industry service companies face an activity slowdown. And for Chancellor George Osborne it presents yet another headache as falling tax revenues from the North Sea and downstream operations hit his budget forecasts and add to his difficulties in deficit reduction.

Dark conspiracy theories surround Saudi Arabia’s decision to stick with current output levels at the Opec meeting last week.

Is it designed to apply pressure on rival oil producer Iran? Is it a ploy to engineer a prolonged price slump to drive marginal producers of US shale oil out of business? What is beyond dispute is that America’s dependence on imported oil has shrunk markedly and the power of Opec to influence world energy prices is not what it was.

On some predictions the US will meet only around a fifth of its oil consumption through imports next year – the lowest proportion since the 1970s.

All this would seem to indicate a step change in the outlook for investment markets. Dominic Rossi, chief investment officer at fund manager Fidelity, says a halving in the oil price since 2007 signals a new phase. “Shale gas, a strong dollar and a weaker Chinese economy are reversing the trends seen across capital markets last decade. Winners of the last bull market are today’s losers, while today’s winners are those markets that de-rated last time around.

“Our conviction in this equity bull market, led by the US and the developed world, continues. 2015 will be another good year for these equity markets. The fall in oil prices will boost economic activity, and allow the Fed a greater degree of freedom to remain accommodative as growth accelerates.’

For private investors with stock market savings dominated by big holdings in companies such as BP and Royal Dutch Shell, this has been unsettling. BP has clattered down from 523p to 420p while Royal Dutch Shell “A” have lost 321p a share from their high to £21.32. But the raison d’être for holding these shares is dividend income. Barring a sustained price fall below $75 a barrel, those dividend payments look reasonably safe for now.

Travel companies such as Stagecoach and National Express will benefit from lower fuel costs along with airlines. And among the beneficiaries will be companies with high distribution bills. Here AG Barr has been identified by the Investors Chronicle as a gainer. Shipping more than 20 million cases of own-label soft drinks entails a huge fuel bill. That will have come down notably in recent weeks.

SUBSCRIBE TO THE SCOTSMAN’S BUSINESS BRIEFING

Get the latest business headlines from a variety of news sources emailed to your inbox each morning