On Friday (January 3), global oil markets as well as broader equity indices got the jitters as a result of growing geopolitical tensions between the US and Iran. On Thursday, the international benchmark Brent crude had closed at $66.25. The next day, the price touched a recent high of $69.20, the highest level seen since September.
But even if, as we all hope, the issues behind the current volatility don’t escalate, we can’t ignore the fact that there are many issues making share prices volatile at present. And FTSE 100 investors are wondering how this may affect their share portfolio, especially if the price of Brent crosses the $70 a barrel mark.
Increasing oil prices and FTSE shares
Unsurprisingly, oil and energy stocks rose on Friday, both globally and in the FTSE 100. Oil giants BP (LSE: BP) and Royal Dutch Shell were the standout winners, rising 2.75% and 1.86% respectively.
But regardless of the current situation, as we start a new decade, I see value in holding an oil company in a long-term portfolio anyway. My choice for both capital gains and passive dividend income would be BP.
BP has an enticing dividend yield of around 6.5% with a forward price-to-earnings (P/E) ratio of 12.8. On 29 October, it released lukewarm third-quarter 2019 results due to “lower oil and gas prices and significant hurricane impacts“. Yet the result beat market expectations. And quarterly operating cash flow of $6.5bn was impressive.
Management has been diversifying the portfolio and increasing its alternative energy products, including renewable fuels and power.
Over the past 52 weeks, the share price has fallen about 4.9%, but the dividend income from the oil ‘supermajor’ would have cushioned the blow, especially if those dividends were reinvested.
Not everyone wins when oil prices surge
Oil prices matter to a large number of investors. If you held shares in British Airways-owner International Consolidated Airlines Group, whose largest variable expense is fuel costs, you would have noticed that the shares ended Friday down 1.76%. And the share price of cruise operator Carnival traded lower on Friday too.
Rising oil prices may also impact the price of other shares like consumer cyclical stocks. If higher oil prices were to become permanent, the average consumer would have less disposable income available for discretionary goods and services such as entertainment, luxury items, or non-essential travel.
A Fool’s view
It may not be an exaggeration to say that many investors have a love/hate relationship with energy, particularly oil companies. Over the past 20 years, the price of oil has fluctuated between from as low $28 per barrel to as high as almost $165.
Understandably, it’s next to impossible to keep abreast of such daily developments in the geopolitical arena or financial markets. This is why portfolio diversification is key. It’s all about reducing risk and making your long-term risk/return ratio more attractive.
For example, instead of concentrating on a few shares, you may decide to buy into an exchange-traded fund (ETF), such as the FTSE All-World ETF, which tracks a large number of stocks around the world. If you prefer domestic exposure only, you could buy into a FTSE 100 tracker fund.
But for those who continue to invest in a diversified range of shares for the long-term, the recent geopolitical developments will likely be just another headline and solid companies you believe in for the long term will be what count.
tezcang has BP and CCL covered calls (January 17 expiry) on BP ADR shares listed on NYSE. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.