Threadneedle is looking for only a moderate fall in the oil price over the next 12 months. Steve Tho...
Threadneedle is looking for only a moderate fall in the oil price over the next 12 months.
Steve Thornber, head of the global oils sector team at Scudder Threadneedle Investments, says the oil price, now around $30 a barrel, is at an unsustainable high. He does not think, however, that it will fall as low as its long-term average which is between $15 and $20. He predicts it will fall to $24 in 2001 and to $21 in 2002.
Thornber says the high prices are positive for oil companies, whilst energy-intensive areas, such as transport, logistics, chemicals and airlines, will suffer. Those energy-intensive companies which are based in Europe will be worst hit due to the high fuel taxation rates, Thornber says.
He adds: "Oils make up 10% of the UK index, 5% of the US index and between 5-10% of the European index. These markets will profit more from the high prices than the Asian market which has a low exposure to the oil industry."
Even so Threadneedle does not see fluctuations having a huge impact on world economies or stock markets and Thornber sees no evidence the high oil price is having much of an impact on inflation rates and economic growth, pointing out that today's world is now more efficient in the use of vehicles and heating than 20 years ago.
As the US economy has been very strong over the past seven years, growing at a rate of about 4.5% pa, Thornber says it may be a good thing if the high price of oil slows it down a little. He adds the UK economy may be eased in the same way.
Threadneedle is looking to overweight oils in the UK with 12% exposure to the sector in the All-Share, above its 10% weighting. Thornber favours both Shell and BP. He says: "Although the price of oil will fall next year, it will remain strong.
He estimates both companies are undervalued, firstly because the market tends to view oils as risky, remembering oil at $10 a barrel only two years ago, and secondly because of the behaviour of oil companies in the past. During periods of high prices Thornber says they tended to invest in too many projects and then failed to make much profit.
He adds "This time around, however, the companies are being much more disciplined with their earnings from the high prices. An overweight position is good as profitability should be high."
Ian Henderson, the fund manager for resource funds at Chase Fleming Asset Management, is overweight in oil stocks with a weighting of 32.4% and agrees that the oil stocks are undervalued, not having risen in accordance with the oil prices. He says the oil price will fall to only $25 in 2001, and that some stocks are trading on just three times their cash flow.
He is skewed towards those companies which receive a direct benefit from the high oil prices, preferring exploration and production companies to the multi-nationals such as Shell.
Susan Smith, head of European Equities at M&G, believes oil prices will fall next year as there is no shortage of crude oil. She says the price is high at the moment not because of a lack of crude oil but because of the lack of oil refining production.
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From 6 April 2019