Not only are stock investors having to navigate the stormy seas of a volatile FTSE 100 index, but now the oil price is slumping too. Unlike some other commodities or raw materials, a lot of FTSE 100 firms depend on oil. A swing in the price of oil can impact revenues and ultimately profitability.
Given that I’ve recently been adding to my new 2020 ISA allocation, the oil price move needs to be looked at carefully. My Stocks and Shares ISA is a great way to shelter from tax any capital gains I may make on my stock investments. It also enables me to keep my stock investments in one place, making it easier to track my performance.
Falling oil price, falling FTSE 100?
It’s a big misconception that oil price falls and share price falls are related. Just because the oil price is falling, doesn’t mean the stock market falls as well. In the short term, sometimes it does, mostly due to a general sell-off linked to negative sentiment. For example, back in March when the Covid-19 pandemic was picking up pace, investors were selling everything. Stocks, bonds, oil and more. But this shouldn’t be confused with the longer-term trend.
A lower oil price could actually boost the share price for some FTSE 100 firms. Take airlines for example. Firms such as easyJet have taken a heavy revenue hit due to low demand at the moment. But its costs could have been eased somewhat due to lower oil prices. While an official figure is hard to find, the fuel consumption for the firm is into the millions of tonnes per year.
Yes, some of this will have already been fixed using derivatives, but the bottom line is cheaper oil means cheaper fuel. This lowers the cost of operating for easyJet, which should trickle down to higher mid-term profitability.
How should I position my ISA?
Given the above, I would definitely think twice before selling out of any existing ISA holdings. Do some homework on the firms you have shares in, and see whether the lower oil price may help to reduce its costs. If this is the case, then this could mean added potential to fuel a share price rally this year.
What about actual oil firms, such as BP and Royal Dutch Shell? Relatively speaking, the slump hasn’t brought the shares prices down excessively. Some commentators are putting this down to the fact that both firms have strong balance sheets. Also, BP has announced a large scale £2bn cost-cutting exercise by the end of next year. Measures such as these should help BP to weather any short-term oil price falls.
For ISAs, it’s always worth thinking about your investment on a time scale for the next five or 10 years. The fall in the oil price is short term, and it’s unlikely to stay this low for several years. So I’m trying not to be too worried about the slump, and rather focus on investing in firms that can benefit from it.
Jonathan Smith and The Motley Fool UK have 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.