Since the beginning of September, the benchmark FTSE 100 index has dropped over 5%. A buying opportunity, you might well think to yourself. But can we do better than that, by looking at some of the sectors within the UK stock market that have suffered more over the last month?
Bringing up the rear in performance over the last month with a 19% fall is the Food Retail sector – but this is for very good reasons, with the pressure on supermarkets from the German discount chains Aldi and Lidl, resulting in worsening profit performance from Tesco, Sainsbury and Morrisons. In my judgement, while there may be a value investing opportunity in these names, timing any investment is proving tricky, to say the least.
I would rather focus on another large sector that has been some beaten up – the Oil & Gas sector, which has dropped over 7%. This has been principally driven by the precipitous drop in crude oil prices on both sides of the Atlantic, with Brent crude oil now costing a tad under $93 per barrel, $22 lower than the lofty height of $115 per barrel touched back in late June (Chart 1).
Chart 1: The Fall in Brent Crude and the Impact on the Oil & Gas Sector
Source: Author, Bloomberg
Why Could Oil & Gas Prices Rise?
With Winter approaching and the possibility of a cold, hard winter in the United States triggering greater demand for oil products such as heating oil, not forgetting the potential of disruption in supply of oil and gas from our Russian neighbours, we could at some point see a sizeable rebound in global crude oil and natural gas prices. After all, OPEC nations are also keen to see crude oil prices stay above $90/barrel for their own, budgetary reasons, as oil and gas represent the vast majority of their government revenues.
I suspect, furthermore, that global markets under-estimate the strength of the growth in long-term energy demand from the mega-sized emerging economies of China and India, which between them boast a population of over 2.3 billion who are currently using a mere fraction of the oil & gas per head that we consume per year in the Western world.
Oil & Gas Exposure via Stocks, Sector ETFs
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