Sell the stocks
But this is not to say that oil companies are a good investment now. “The recent drop in the oil price hasn’t been fully reflected in the price of oil stocks,” says Peeters.
And Peeters is not the only investor to look at oil producers with suspicion. “In broad terms the oil majors require an oil price of $50-$60/barrel to maintain current dividend payouts, capex commitments and high levels of gearing. Below this level, cash flow is insufficient to support, let alone progress dividends and alternative sources of funding are required,” says Stephen bailey, manager of the Liontrust Macro Equity Income Fund. “So we have reduced our Oil & Gas exposure over the last 12 months, selling BP entirely, and we are now in the process of reducing our final sector holding in Royal Dutch Shell,” he adds.
With global growth forecasts sloppy, oil companies will hope for a slowdown in production to lift prices. However, with crude inventories now close to a record high it would take time for this to be felt in prices. If it happens at all. While production from non-OPEC countries is expected to decline if prices stay well below $60, OPEC production is to increase by 1.1 million barrels a day in 2016, and 1.2 million in 2017, according to estimates by the Institute of International Finance.
And just keep in mind the recent pattern of continuous downward predictions of the oil price, not to mention the increasing competitiveness of alternative energy sources and the long-term consequences of the Paris climate agreement which have yet to be felt by the oil sector. Let’s face it: there probably are more enticing alternatives to the commodity once dubbed ‘the black gold’.
