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Forget a Cash ISA! Why I think oil share prices are back

Oil share prices are fickle beasts. Oil exploration and production (E&P) companies heavily exposed to the price of black gold can experience high share price volatility. In addition, the recent plunging oil price is thought to make life very hard for any organisation relying on oil for its main source of revenue.

Likewise, the coronavirus shutdown makes life difficult for many FTSE-listed firms. The plummeting demand for products and services encourages investors to sell shares. Many flock to ‘safer’ assets such as cash. With bond yields now so low, a Cash ISA is an attractive alternative.

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However, Cash ISA rates are not much higher than the current UK rate of inflation of 1.2%. So, while cash shouldn’t lose you money, it won’t make you much either. Unlike, potentially, oil share prices.

Oil share prices

By oil share prices, I’m referring to the shares of companies based in the oil industry. Companies like integrated oil major, Royal Dutch Shell (LSE: RDSB), and smaller E&P companies, Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW).

The share prices of all three companies plummeted with the rest of the FTSE near the end of March. However, by the time the Brent Crude oil price reached its bottom on 21 April, shares in all three companies were up between 40% and 115%.

The smaller E&P companies experienced an immediate small dip in price, likely as a result of the oil price drop. Shell’s share price, in contrast, kept climbing. And the overall trend for all three companies since this date is a very positive one.

Demand shock beginning to lift

This shows that the demand shock created by the government’s coronavirus-induced shutdown affected share prices of oil companies far more than the declining oil price.

The good news is that the lockdown is beginning to lift globally, which should increase demand once again. Great news for oil firms and their shareholders.

Royal Dutch Shell is currently trading at a price-to-earnings ratio (P/E) of around 15. This is below the oil and gas industry average of 17, meaning its shares are still relatively cheap.

In addition, despite its dividend cut, Shell offers an estimated forward dividend yield of around 3.7%. This is far in excess of a good Cash ISA rate, around 1.5%. And if demand does increase, as I think likely, then there is also the prospect of capital gains to look forward to.

Premier Oil and Tullow Oil are trading at P/Es of 2.9 and 2.5, respectively. Premier isn’t paying a dividend currently, but Tullow’s is around 6%. Again, a rate far in excess of even the best Cash ISA. However, with reward comes risk – both these smaller companies are heavily debt-laden.

Shell, in contrast, is integrated and it can use cheaper oil prices to improve margins at its refineries. It can also use its trading arm to create value. This makes it a far better investment, in my view, so it’s unsurprising its share price has been climbing.

So, for now, I’m forgetting my Cash ISA. There are higher returns to be made on the oil share prices, and on the majors in particular.

There are potentially higher returns to be made elsewhere on the FTSE, regardless of its direction.

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Rachael FitzGerald-Finch owns shares in Royal Dutch Shell. 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.