Too Much of the Black Stuff
Too Much of the Black Stuff: Liz Rees of Willis Owen reports upon a drop in oil prices and markets losing momentum
The weather is not the only thing to have adopted a gloomy tone this week as markets have also lost momentum. The key driver of the lacklustre performance has been further falls in the oil price, which has now given up over 20% this year.
The FTSE 100 index has been particularly sensitive to this due to its high exposure to the oil and gas sector and it is worth remembering that BP and Royal Dutch Shell are among the top 5 domestic dividend payers. If you invest in Income Funds it’s likely these companies will account for a good chunk of the dividends you receive, though Woodford Equity Income is a notable exception. BP has stated previously that a consistent oil price of $60 is required to maintain dividends (and its capital investment programme) and Woodford remains sceptical of a return to this level.
For global income seekers however, there was more encouraging news when US regulators gave the nation’s Banks the go ahead to pay out most of their earnings as dividends this year; a sign of their confidence in the financial health of the sector. Pay-outs are expected to reach $100bn from the big six, 50% ahead of last year.
Turning back to oil, as Brent Crude touched $45 per barrel, blame was directed at the increased shale production from US (new rigs have increased by 50% in a year). Furthermore, the OPEC cartel’s concerted attempt to cut production does not appear to have had much impact on stockpiles.
Yet, on the positive side it does seem to be largely a supply side issue. Falling demand would be more of a concern to me as this could put global growth under pressure. For now, growth remains reasonably buoyant so I can’t see the price revisiting the $27 we saw in early 2016 which led to a sharp market setback. The outlook for China’s economy is less of a concern than it was back then, and indeed at the time of writing, oil is rallying.
Cheaper oil is of course welcome news for us all as consumers. You may have noticed the effects already starting to filter through to petrol prices at the pump when you fill up your car. The lag effect should mean further benefit to come and more money in our pockets should be good for consumer spending.
It also means that we may see a halt to the recent spike in inflation as energy costs are a significant component of the CPI index. Even so, I retain my caution on retail sales in the UK, noting that the Bank of England this week has asked lenders to set aside £11.4bn as provision for defaults. This is a response to 10% growth in consumer borrowings over the last year.
On the politics front, the Conservatives finally managed to tie up a deal for support from the DUP which will give them the required, albeit narrow, majority. The agreement includes commitments that the pension triple lock and winter fuel payments will be maintained, a relief to some of our older citizens no doubt. EU Brexit Secretary David Davis reported Brexit talks had got off to an encouraging start, although until October, discussions will cover little beyond our exit bill and the rights of the 4m EU citizens residing in the UK.
So with the weak Pound buying us less holiday euros and petrol getting cheaper it looks like a ‘staycation’ may be a good bet this year! Having chosen this option myself I highly recommend it. We have some beautiful countryside to explore, if only the sun would keep shining.
Important Information: Willis Owen does not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.