How to fuel your oil investments

 

As every motorist knows, the price of petrol has hit new highs. But does this mean that now is a good time to invest in oil companies?

Although petrol prices at around 120p a litre are linked to the cost of oil, there are several other factors to take into account. Tax and VAT make up around 75p of the pump price with only 40p accounting for the price of the fuel.

While the oil price has slid back a little to $83 since it hit $87 a barrel last week, the International Energy Agency has warned that the price is now overheated.

Oil drill

Pumped up: Predicting future prices is only for the brave

If this encourages speculators to pile in, they could push the price higher. However, most experts feel it will remain around these levels barring any major economic upsets in the coming months.

Only the brave or the foolhardy would attempt to predict a more precise sum given its massive volatility.

In the last two-and-a-half years, the price of a barrel of oil has peaked at $148 and bottomed at nearly $30.

'It might increase a bit on the upside, but it's likely to stay in this range,' says Darius McDermott of Chelsea Financial Services.

Investors who favour a sustained oil price have a number of ways to jump on the band wagon. They could pick one of the funds covering natural resources, energy or Russia whose financial strength is closely allied to the oil price.

Alternatively, they could buy an Exchange Traded Fund which simply tracks the price of oil, or even buy shares directly in companies such as BP and Shell, which are also paying decent dividends.

'Most people who want to go into this area are best suited to a diversified natural resources fund, which is more of an allrounder,' says Ben Yearsley of Hargreaves Lansdown.

While natural resources funds invest in oil and gas producers, they also hold other commodities such as metal and gold as well as mining companies.

Commodities have performed well over the last five years. For example, £1,000 invested in First State Global Resources in 2005 would now be worth £2,800 while JP Morgan Natural Resources has turned the same amount into £2,660.

The energy sector has fared impressively too. CF Junior Oils Trust, which holds 83pc in oil and gas producing companies, has risen nearly 80pc in the past 12 months and 124 pc over five years. Unsurprisingly, the manager is bullish about oil prices.

Oil and mining has helped Neptune Russia and Greater Russia increase 90pc in the last 12 months but it also covers the consumer sector reflecting the spending power of Russia's increasing middle class.

Justin Urquhart Stewart of Seven Investment Management is a fan of ETFs, but he warns this is not the time to buy an oil ETF.

'I'd rather go for a FTSE 100 ETF or tracker as many of these companies benefit from oil and mining.'

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