How changing oil prices can affect your investments

07 January 2020

3 minute read

Oil prices have fluctuated sharply 2019. We examine what this could mean for your savings and investments.

Who’s this for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • Why oil prices are fluctuating
  • What impact this has on markets
  • What changing oil prices mean for your investments.

The price of oil has been volatile in 2019. Having spiked in April and September, the price has been dragged down in recent months amid growing fears of a global economic slowdown.

The suspension of some Russian crude exports to Europe prompted oil prices to rise above $75 a barrel in April 2019, with the price of ‘black gold’ spiking again in September after drone attacks on a facility owned by energy producer Saudi Aramco which wiped out some 5% of global oil supply.

Since those peaks, the price of Brent Crude has shown further volatility. So what are the possible implications on your investments? Here’s what you need to know.

Where are oil prices heading?

This is the $64 thousand question. The price of oil is hard to predict for a number of reasons, with conflicting forces causing it to be volatile. The negative sentiment on the global economy and fears of a slowdown are negative factors, while rising tensions in the Middle East, including targeted attacks on oil refineries in Saudi Arabia, have led to price spikes in recent months.

The end result is that in 2019 the price of Brent Crude has traded roughly between $60-80 a barrel.

Meanwhile, as technology has improved it has become easier to get oil from the ground in more awkward areas. This has helped put a ceiling on the price of the oil, and has for example made America more self sufficient, complicating the oil price further.

The impact of rising and falling oil prices

Lower oil prices may benefit transport and manufacturing industries which are heavily dependent on oil, as their costs will fall. If these industries choose to pass on the savings they’ve made to customers, household incomes may rise, boosting consumer spending. The impact is likely to be smaller where the fall in the oil price is temporary.

When oil prices are rising, this tends to push up the prices of energy company shares, which could potentially be good news for UK investors given that the oil and gas sector accounts for just over 14% of the FTSE 100. If steeper oil prices drive inflation higher, it’s not necessarily a bad thing for some other shares either. For example, during periods of rising inflation, good quality businesses often have the chance to raise prices more than inflation. This is because their customers value their service or product, meaning there will be those who are prepared to pay for it whatever the cost, though other customers may no longer be in a position to afford it and other businesses may not be able to raise their prices as consumers reduce their purchases or do without what they provide.

How to invest in oil

Given the wide fluctuations in their prices, investing in oil, and commodities in general, is not for the faint-hearted.

But for intrepid investors prepared to accept the risk of losing capital, there are several ways to invest their money.

Many investors either opt for a specialist fund or exchange traded fund (ETF) to access oil. ETFs are passive funds, which track the performance of a range of asset classes and can be traded in ‘real time’ just like shares.

Accessing commodities via ETFs has become much more commonplace over recent years, as during that time investors have seen a plethora of resource-focused funds, known as exchange traded commodities (ETCs), enter the market. ETCs either track the price of a particular resource, such as wheat, or a particular sector, like energy. As they are passive investments, their value will fall and rise in line with the market or commodity they are tracking.

Find out more about ETFs

ETFs and ETCs can be very complex, especially those that deal in natural resources. For example, some funds offer direct physical exposure to a particular commodity, whereas others have what’s known as ‘synthetic’ access to a market. That means instead of physically holding commodities, a synthetic ETC usually relies on futures contracts, which is a type of derivative – a legal agreement to trade a particular commodity at a certain price in the future.

ETCs that operate this way come with their own set of complexities as they carry counterparty risk – the issuer could default. As such if the counterparty, in this case the derivative issuer, does not pay what’s due, when it’s due, or goes out of business, investors could lose all of their capital. This is regardless of the performance of the underlying assets. As such it is vital to bear in mind that if such a situation occurs you will not be protected by the Financial Services Compensation Scheme (FSCS).

Always bear in mind first that any sensible investment strategy should involve holding a wide spread of assets. This approach means that if one or more of your investments rise you will benefit but, if they fall, there should be an element of protection because, hopefully, some of your other holdings in different asset classes will be going up in value.

Find out more about investing in commodities

Investors should bear in mind that our referring to these markets and assets does not constitute advice or a personal recommendation to invest in these or any other investment.

As is the case with all investments the value of ETFs and funds can go down as well as up, and you could get back less than you invest. If you’re considering investing, you should read the product prospectus first to ensure that you fully understand it and all the associated risks.

If you’re unsure about whether investing is right for you, seek independent advice.

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