If Oil Prices are Low Should I Buy Stocks?

When it comes to buying shares in any product or commodity, the “rules” are generally the same regardless of the product or company in question. Serious investors are advised to consider the recent performance of the share (and indeed the company behind it) before considering a serious investment. Whilst a recent fall in price might seem like a good investment opportunity, it may be that there is a more sinister reason for the sudden fall. For example, this could be the first major indication that a company is floundering and investment is unwise.

There are many reasons for the recent drop in oil prices and for the car owners everywhere the knock-on effect to petrol prices has been reason for celebration, as we discuss in this recent news story: What Are the Pros & Cons of Plummeting Oil Prices?

However, it also has many investors and would-be investors asking whether low oil prices gives them the ideal opportunity to invest in shares.

Best time to buy since 2009

The current question over oil share is based on the sharp decline of the price per barrel (PPB) which occurred between June and December of 2014. At the start of the period, a barrel was selling for approximately $116 whilst by the end of that time the PPB had fallen to $67.50. The sudden decline has City insiders labelling the current period the best time to invest in oil since 2009.

The problem...

The issue for many when it comes to oil share buying is that the companies will simply be forced to cut the dividends they give to their shareholders.

Russ Mould of AJ Bell Youinvest, the fund shop, commented on this in an interview with The Telegraph: “The big worry is that the oil companies will turn off the dividend tap. When less money is coming in, companies want to keep hold of it and become less willing to reward shareholders with dividend payments."

That being so, these dividend cuts – were they to happen – are not imminent. Royal Dutch Shell, for example, has not cut dividends since 1945. However, from a damage limitation perspective, the major oil companies are likely to cut costs and rid themselves of assets should the trend continue.

The safe solution

When it comes to share buying, there is no safe option. However, by taking all of the available information, an insider or fund manager is able to predict the likely benefits of an investment.

The Telegraph suggests some “safe” options for share investment, such as the introduction of an Oil Exchange Traded Fund (an ETF) which tracks the movement of prices and companies at a low annual cost to the holder. Meanwhile, Forbes went on record to say that with the current prices, likely trends and “attractive valuations” this was a good time to buy. 

Image: Stock Exchange by Rafael Matsunaga