A slippery trade: the slump of oil gives reason to bear

LONDON (Reuters) – The latest collapse in oil prices has proved that some investors are right not to trust energy stocks this year.

Crude oil prices reached their highest level in four years in early 2018, as tensions with Iran and cuts in OPEC supplies raised concerns about the decline in oil prices. the global supply of oil.

But the storyline has been reversed since October, as worries over the global trade war and rising American oil shale production have increased, pushing oil to its lowest level in a year on Friday. . Brent's barrel fell to $ 60 a barrel after peaking at $ 85 in early October.

Although the major oil companies have somewhat cleaned up their balance sheets since the collapse of the oil price in 2014, their shares are still sensitive to movements in the underlying commodity – higher crude yields more revenue important.

When prices climbed earlier this year, the big banks recommended investors buy back in the sector. Many, especially in Europe, have followed this advice.

But given the recent falls, some of those sitting on the sidelines felt their caution was rewarded.

Kevin Gardiner, global investment strategist at Rothschild & Co Wealth Management, said he is pleased not to have invested in bullion trading, having considered it earlier in the year. .

"At the moment the ink was drying up on bullish rhetoric about the price of oil, we turned around and an area that seemed intriguing is now much less, in the short term," Gardiner said.

"You have to be very careful with commodities because it's a story of market timing," he added.

Investing in European oil stocks early this year would have been very lucrative – if you had the foresight to sell at the peak of October.

That would have generated a solid 15% return, not to be overlooked in a global bear market under construction.

In Europe, the energy sector remains the best performing sector this year, up 2.2% from here on November 22, when all sectors, with the exception of health , are in the red.

The main decision that investors face is knowing they can withstand the volatility of the sector.

"The collapse of last month has really scared the institutions," said Ashley Kelty, oil and gas analyst at Cantor Fitzgerald.

"Investors recognize that stocks are basically always right, but it's very difficult to determine long-term value, so many people will sit idly by until the price of oil stabilizes."

Bank of America Merrill Lynch's November survey of fund managers showed that investors had reduced their allocation to energy stocks by seven percentage points compared to the previous month, while European fund managers also reduced their positions.

Energy index tracking ETFs posted strong outflows, bringing their assets under management back to April levels.

Chart: November 23 outflows of Oil ETFs – tmsnrt.rs/2R86GeG

Energy stocks had already largely retarded oil gains last year, as investors remained cautious about crude oil prices that could easily collapse.

"When the price of oil came back, most long-term institutions recognized that they were very underweight in oil, but were rather happy to give up the first 20 to 25% of the increase before they returned. , mainly because they were very suspicious. this oil could bounce very quickly down, "said Kelty.

While many earlier this year predicted that the gap would narrow from the bottom while oil stocks were catching up with crude price gains, the latest data show that the gap is narrowing from the top, the crude it's crumbling, which proves that bears are right.

Chart: Ignore the gap – tmsnrt.rs/2QAabu9

Energy values ​​are better positioned to support lower oil prices than in the past.

The largest oil companies in the world, including Exxon Mobil (XOM.N), Royal Dutch Shell (RDSa.AS) and BP (BP.L), are now able to generate profits at oil prices approaching $ 50 per barrel and have promised to stay disciplined in terms of spending, even as the prospects for oil prices look better.

"Cash flow improvements from the energy sector generally remain pretty good," said Caroline Simmons, assistant director of UBS Wealth Management's investment office in the UK.

But the volatility of oil prices is a problem not only for investors but also for the companies themselves, she added.

"What they want is a stable oil price so they can make decisions about future investments." No matter the level, they just need stability, "she said.

BP is considering long-term investments based on an average oil price of $ 50 to $ 65 a barrel, announced its chief executive Bob Dudley in October.

Alastair Bishop, director and portfolio manager of BlackRock's natural resources team, which holds significant stakes in the world's five largest oil and gas companies, said he did not think capital spending would increase in the near future. short term.

Chart: Big Oil Cash Flow – tmsnrt.rs/2Pn84xn