Displaying items by tag: Commodities
Oil prices have risen spectacularly over the last year, with Brent crude now trading above $80 per barrel. However, the question for investors is what to do about the rise. Have they already missed the gains? Additionally, oil has the complication of being difficult to invest in directly because of the cost of rolling over futures positions. Therefore, the best way to take a position in oil markets is through several ETFs. The tickers to look at span from those covering major oil companies to those more weighted towards E&P companies. Here are some of the funds: VDE, XLE, IXC, IYE, XOP, OIH, and USO.
FINSUM: We suspect that exploration and production companies will gain the most from recent price rises as their businesses will be most directly impacted by gains (just like they were most hurt in the downturn).
Investors need to take note of the oil market, which has been spiking recently. Prices for Brent crude are now above $80 per barrel, a price that would have seemed unimaginable even a year ago, and a world away from the $20s we had in early 2016. The market is partly being driven higher by geopolitics, such as the new sanctions against Iran, but it is also a product of supply shortfalls. Higher prices are now coinciding with all the cost decreases firms made during the market rout, which is allowing them fat margins and the cash to pay dividends and pay down debt.
FINSUM: If the market can stay elevated, which seems likely for a while, then it will be transformative for the many oil and oil-related companies that have been struggling for years.
We tend not to write too much about oil, the reason being our readers don’t seem too interested in it. However, the market has quietly seen a really resurgence over the last year or so, and has risen dramatically from lows in the $20s in 2016 to $75 now. The core reason why is that a booming global economy has pushed up demand for oil (to the tune of 5 million barrels per day), which has largely cleared the glut of oil inventories that had been plaguing the market.
FINSUM: The big question now is whether OPEC maintains the supply cuts. It is worried about higher prices inducing increased production from rivals, but the reality is that Saudi Arabia needs oil prices to stay high right now for several reasons (e.g. IPOing Saudi Aramco, domestic social and economic reforms etc).
One of the market’s big fears at the moment is rising rates. Inflation is rising and the Fed is poised to hike rates three times this year. With that in mind, Barron’s has chosen some stocks that will help defend your portfolio against jumping interest rates. Stock with good dividends tend to perform poorly in rising rate periods, but if you are looking for good-yielding stocks which will continue do well, look at commodity-related companies, whose free cash flow can maintain dividends. Exxon Mobil, Schlumberger, General Motors, and Kimberly-Clark all look set to do well.
FINSUM: So what sets these stocks apart is that their dividends look sustainable AND they have attractive valuations, both of which make them more likely to perform well.
Until the market downturn over the last couple of weeks, the oil price had been rising strongly for a period of several months. OPEC’s strategy to cut supply to the market seemed to have balanced supply and demand, which boosted prices. However, one big beneficiary of the cuts was the US shale industry, which has been boosting output to the highest levels ever. This big surge might be the ultimate unwinding of the price rise, however, as US output is surging to levels not seen since oil was at $100 per barrel. This is likely to once again flood the market with supply, sending prices back downward.
FINSUM: We think this oil output growth is unsustainable, both because it will lead to oversupply, but also because it will eventually crack OPEC’s resolve to contain their own output (as the benefits are disproportionately flowing to the US).