One oilie that has posted some monster gains in recent sessions is Royal Dutch Shell. The FTSE 100 colossus has barged through £23 per share and to two-and-a-half-month highs at the start of this week, propelled by the Brent benchmark rising through $70 per barrel for the first time since last May.
And blue-chip rival BP just moved through the 500p marker and to levels not seen since the middle of November, too.
It hasn’t exactly been a shock to see shares in the oil majors rising in the wake of rising tensions in the Middle East, as markets gear up for possible disruption in the supply of the black stuff. And further oil price gains could be just around the corner with this psychologically-critical milestone now fallen and signs that tensions in the politically-sensitive region are escalating.
State of play
Neither US President Donald Trump nor the Iranian authorities are showing any signs of dialling down the rhetoric at present. It’s clear that the Middle East is becoming an increasingly volatile powder keg that threatens world peace and that could also have severe implications for the global flow of oil. But are investor expectations of oil reaching ever higher highs because of this unrealistic? Well, the boffins at Goldman Sachs certainly suggest so.
In a report released today, its analysts are suggesting that black gold prices may struggle to remain around current levels unless a significant disruption to supplies from the region transpires. The bank pointed out that recent trouble at the US Embassy in Baghdad took place away from nearby oil fields and that any Iranian actions may not take the form of moves on oil-producing assets.
Goldman Sachs said that prices were already looking toppy following “an over-enthusiastic December risk-on rally in the face of limited evidence of a material acceleration in global growth,” and that prices now sit at a chunky premium to its “fundamental fair value” of $63 per barrel.
This underlines the importance of investing in companies you believe in for the long term and not reacting to short-term price spikes (and we all hope this situation is short term and that some sense can prevail).
What should you do?
But with the political situation moving hour by hour it’s clear that no scenario can be ruled out, and that oil prices could defy the warnings of Goldman Sachs and keep shooting through the roof for a while. Still, I for one am not tempted to load up on the likes of BP or Shell right now.
Those warnings from the investment bank add to my existing sense of unease as a slowing global economy, allied with rising oil production from non-OPEC nations, already casts a shadow over crude price forecasts. So despite the monster dividend yields offered by these Footsie oilies, I would rather use my hard-earned cash to invest elsewhere.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.