Reward for backing higher oil price ‘dwarfs’ negative call

Buying up energy stocks has looked “very wrong” but Invesco Perpetual’s Simon Laing believes the reward for backing a rise in oil price will benefit his fund.

Mr Laing, who runs the £453m US Equity fund, said he had recently been recycling cash into stocks trading on “deep discounts”.

“Recently that has meant purchasing energy stocks and looking very wrong,” he said.

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But while the oil price has continued to fall, Mr Laing said he thought positioning his fund to benefit from a rising oil price would produce greater benefits than believing the commmodity’s value will continue to fall.

The price of oil has almost reached half the level it traded at just six months ago after dropping below $60 per barrel.

Brent crude oil, which is the international oil benchmark, dropped to $59.6 per barrel at the close of trading yesterday - virtually half the $115 level it reached in June.

“The market may have this right,” he said.

“Perhaps oil prices will average below $60 in 2015 and struggle to recover in 2016. We don’t think so, but we are quite willing to believe we could be wrong.

“But we are in the business of risk and reward and right now, in our opinion, the reward for thinking that oil prices will remain that low to us is dwarfed by the reward if oil prices were to recover towards $80 in the next couple of years.”

The manager added one of the companies in the oil sector he owned had begun to look like a “distressed equity”.

“These stocks seem to go down every day,” he said.

“The share prices fall steeply when oil prices fall and they fall mildly when oil prices rise.”

Mr Laing said the market’s behaviour towards oil had changed quickly, stating as 2014 came to an end, it was “an end of year race to the bottom”.

It’s poker in reverse,” he said.

“I’ll see your $70 and lower you $5 to $65. 2015 will be fascinating to see who is right. But it seems very unlikely you will find an energy share that has much of an underlying bid during what remains in 2014.”

Mr Laing said some companies had started to react to the lower oil price with a supply response.

“ConocoPhillips has cut its 2015 drilling budget by 20 per cent, Apache has cut its North American capex by 25 per cent and Denbury Resources has halved its 2015 capex,” he added.

“I am reminded of the saying ‘the best cure for low oil prices is low oil prices’, however, patience will be required.”