Oil prices headlines – what are they really telling us?

Exploring energy markets, how to read them, what today’s geopolitical risks mean for inflation, and how disciplined investors navigate uncertainty with a long‑term focus.

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Transcript

SPEAKER_00 0:06

Chief Investment Officer Gary Reynolds is with us right now and he's looking closely at the chart, which I assume might be something to do with oil prices, Gary.

SPEAKER_01 0:14

It is Leo, yeah. What a surprise. Is there any other topic to talk about at the moment?

SPEAKER_00 0:19

Sure. Well, something about around all that that there's a lot of talk about which you can help us understand is spots and futures. Oh, okay.

SPEAKER_02 0:27

So you I think and I know a few of our clients have have said, what's the difference between a futures price and and the spot price? And the answer is the spot price is simply for delivery now. So if I'm selling you a barrel of oil and you say, I want to buy it now, Gary, and I say fine, the current price is$100. There it is, Leo. Fine, that's that's great. That's that's the deal done. You take the oil, I get the$100, I do what I want with the$100. If you say to me, Gary, I want to buy a barrel of oil, but I don't want it until January 2027, then normally I would put the price up on you because you uh have left me to store the oil, insure the oil, and I don't get that hundred dollars in my pocket. So in a normal market, the futures price is higher than the spot price. And that is called, that's a thing called Contango. And it simply means if you want to buy this from me in the future, I'm charging you more so that when you take delivery, I make up for the cost of carrying storage and all the rest of it. Now, at the moment, if if it's much cheaper to buy a barrel of oil in two or three years down the line when you'll still play around$70 for it than it is today, when you're going to pay north of$100 for it. And that is a market that's in a thing called backwardation, and all that means is that it costs more now. And the reason it costs more today than it would in the future is because there's an immediate shortage of the commodity. So because the Strait of Hormuz is closed, there's less oil coming through. One-fifth of the world's oil flows through that strait, and therefore people are short of oil. That's why the price has gone up the short term, but the long-term price is lower, which also tells you what people generally think is going to happen, and that is that the price is going to go back to a more normal level.

SPEAKER_00 2:37

So is this creating a future demand for oil? Are people buying it in more now for the future?

SPEAKER_02 2:43

I I don't think they're buying it so much for the future here, because that that really depends on whether it's sorry, taking advantage of the prices, I suppose.

SPEAKER_00 2:51

Well, not or is it not really the case? It's basically it's just costing more right now. It's not cheaper in the future than it would normally be.

SPEAKER_02 2:58

It's not cheaper in the future. Gotcha. So if I compared the futures price now and six months ago, there's not a lot of difference. Yeah. But the spot price is massively different. So obviously the futures price over one, two, three, four months has shot up. But the the the it's the spot that's that's and that's because there's a shortage now, but there's no shortage in the future. We've got we've got more oil than we need. Remember, the I've quoted before the Saudi oil minister of the 1970s, Sheikh Yamani, said the Stone Age didn't end through lack of stone, and the oil age won't end through lack of oil. And it's true, there's always going to be oil. And the the US, amazingly, in the last 25 years, have discovered um have added a Saudi Arabia in terms of oil capacity to to the to global oil um availability. So it it's not there's not going to be a shortage in the future, and people are still going to divert over towards non-fossil fuels.

SPEAKER_00 4:05

So just going back to what you said, how will the oil age end?

SPEAKER_02 4:09

It'll end when we can, well, if we can find a way of making nuclear fusion commercial, i so we have this incredible ongoing energy supply, but there's a joke about that. You see, we're 20 years away from um achieving nuclear fusion, and in 20 years' time we'll still be 20 years away from achieving it. Sure. But it is ending. So once you've you've got a big change in the emerging markets, which have become industrialized, but the West is less industrialized now, more service-based, we're becoming more energy efficient in all sorts of ways. Cars are more energy efficient today, light bulbs are much more energy efficient, and um that's that's meaning that we are consuming less. So, and as as the Chinese, because of their incredible technological development, have made solar a lot cheaper. So as we move towards these alternatives, we will be we will be in the end, we won't need oil, we won't need any form of fossil fuel. That's that's almost inevitable. It's the speed at which we get there is is is is really the issue.

SPEAKER_00 5:24

So and I'm I'm I'm thinking purely around the value. If oil's got a shelf life, are people benefiting from the higher prices right now before it's not needed anymore?

SPEAKER_02 5:36

Yes, this has been there's there's cut perhaps a couple of ways of looking at this. If you're a if you're um an OPEC member and you're sitting on OPEC, uh organization of petroleum exporting companies, you know, Saudi and the Gulf states that that come together and the the the countries that um push the oil price very high in the 70s and cause mass inflation and huge recessions in the 70s. But let's say if you are Saudi Arabia and your economy is generally reliant on this oil, and you know, even in the 70s, Shah Yemani says it won't you know it won't end through lack of oil, then oil production has gone up, not down. We produce more oil than we need, they've got to try and balance it. Because if they try and get a very high price, customers will buy from somewhere else. If they put the price down too low, they may exhaust their supplies before it's actually needed. It's a balancing act to try and achieve some equilibrium to maximise the sale, maximise the sale proceeds of what they've actually got in the ground before nobody wants it. So tricky, I wouldn't want to be tricky being an oil minister in an OPEC country.

SPEAKER_00 6:59

Gary, not to trivialise the the real impacts of these conflicts, um, a lot of people you know, out of sight, out of mind, so to speak. A lot of people are seeing the impacts on shelves at the petrol problems, for example. When's all this going to end? What impact is this gonna have on inflation? What in the UK economy, what as a country can we look forward to in how soon?

SPEAKER_02 7:28

So the short-term impact has been pretty pretty hard, you know. Shot up to just under 120 last week, dropped back a bit when President Trump made some comments about concluding the the the um conflict. Uh to put it in cut some people are referring back to the 70s and saying this looks like the 70s again, but oil price started the 70s uh below$2 a barrel and entered the 80s at about$38 a barrel. You know, there's a 2,000% increase. We're not in the we're not in the 70s. You know, for it to be in the 70s, you're gonna get the oil price going uh north of$1,400 a barrel, then you're really gonna see your your you know it will be absolutely wonderful at uh cutting emissions because we'll we will think seriously about whether we drive anywhere then. But we're not going we're not going through that, and that's not gonna happen. So you've got the US clearly an Israel with a strategic objective, and that's to degrade Iran's capability of conducting hostilities and certainly to present them getting a nuclear weapon. And the Americans are not going to want to fight a long war, they won't want another Gulf War, they certainly don't want another Vietnam, they won't want to put American troops into Iran. So what you you need to look at is where is the vested interest here? Who does it benefit to stop this conflict? Well, it benefits the US because they they're having to pay for it, and it won't go down well if oil prices are high running into the November midterm elections, which Trump will be mindful of. It certainly benefits China, who imports about 40% of its energy through the Strait of Hormuz, which is closed as a result of this conflict. Um incidentally, you know, China gets about 13-14% of its oil from Iran, but it gets the rest from Saudi Arabia. So there's a big interest in China getting its oil back flowing again through through the strait. It benefits the Iranians, whose economy is in a mess. They need the revenue. So it benefits the other Gulf states. So there's really nobody that benefits from a prolonged war. That being the case, you've got to say the the best call is that the parties find a way of resolving this in the next few weeks. Bear in mind as well that I think the Americans have planned this quite well because they obviously did what they did in Venezuela in kidnapping Maduro and and therefore trying to secure Venezuelan oil before they've gone into Iran. And having gone into Iran, once they've achieved their objectives, you know, that would be it. But they that that means Trump goes to China next month to Beijing for a high-level meeting with Xi Jinping with some leverage. And I'm pretty sure around that time they'll try and do a deal where they can bring the Iranians to heel, get some agreement, there'll be pressure being brought to bear there, and I think it will come to an end. And that being the case, I think this has presented itself, notwithstanding the human cost, which is horrendous. You know, you who who on their right mind wants to see a school bombed? It's grotesque, but it's been there for a long time, and you know, the world's got thousands of years. We are unfortunately as uh a pretty aggressive um species. So but no one wants to see that. But what it's done looking at the investment argument, it's made the type of things that we like for the portfolio cheaper. So we enter it and we as as this as the markets wobble, we look for the opportunity to buy more of the stuff that we think is good for the long term.

SPEAKER_00 12:02

So if you hope the con and everybody hopes the conflict will end soon, as soon as possible, does this mean that you and the investment team, if you're looking for opportunities, does this does this force you to move quicker?

SPEAKER_02 12:14

It can force you to move quicker, because it's almost like all of a sudden things you're interested in buying drop in price, sometimes quite substantially. And you think, well, if I do believe this conflict's coming to an end, and the whole of history tells you conflicts do come to an end, then you you take the opportunity and try and go for the asset.

SPEAKER_00 12:40

But that doesn't mean bypassing your usual processes. Never bypass the stocks.

SPEAKER_02 12:46

Never bypass the processes. Those processes are designed to keep your keep you grounded at at all times.

SPEAKER_00 12:54

So what do you do? Adjust your focus and pour more resource into analysing those stocks in order that you can get them on board while they're at an attractive price?

SPEAKER_02 13:01

You run you run the screening, and because the prices dropped on some of the stocks, they become viable and more attractive than they were previously. So you look at you look at those and you you you look to buy them. Um you know we bought a sahi recently. Um that really wasn't necessarily directly a result of the oil conflict, but it gives you an idea that decent stocks sort of rock up and they they become they become good value. James mentioned that in the recent update.

SPEAKER_00 13:32

Um how's it been going since you bought into it? It's great.

SPEAKER_02 13:36

It's great because I now can drink more beer feeling I'm doing the portfolio a lot of good. And Asahi makes a good beer, and they make Peroni. They make Peroni. Peroni. I know, and many a lot of people don't know that. They think a peroni is Italian. Yeah. It might be an Italian beer, but it's owned by it's owned by a Japanese company. Power of a brand. But Leo, they do make very, very good. Asahi do produce very, very good. Before anybody looks at this thinking that the this crisis is driving me towards alcohol, let me say Asahi produces extremely good zero alcohol beers. Asahi super dry, zero, awesome, peroni zero, awesome. Good beers.

SPEAKER_00 14:15

Fantastic. Gary, talking about multiple brands. Jake in the last client's seminar mentioned Associated British Foods, a brand that's in 90% of households' cupboards. Yeah, great. And massive, massive number of brands. How's that stock been doing? And that's been doing okay.

SPEAKER_02 14:34

Um, you know, we we we actually don't look at it too much in the show.

SPEAKER_00 14:38

Staple stock in the cupboard, isn't it?

SPEAKER_02 14:39

Yeah, well, that's Chetley's tea and the rest of it. So it's some some good stuff. And I think that's a when we buy these stocks, we review them at least once a year. So they will get screened and they'll get picked up if they're if they're metrics, if the if the reasons we bought them, um, if the scores drop, so we have a scoring system for the stocks on the screening, and they have to score above 50. The hundreds of top ones, the the bottom. If the stock drops below 50, we'll have a look at it. Won't necessarily sell it, but we'll have a look at it. We won't generally buy it unless it's above 50 in the first place. But what happens sometimes is that the value you believe was there gets seen by the market and the stock shoots up, and then you have to sell. You might have a stock that you really do like, but you have to sell it because it's no longer value, and something else will then be better value, so you move on to the other to the other asset.

SPEAKER_00 15:38

So you spot the you spot the the opportunity, becomes um popular, more and more buy into it, that shoots the price up, you sell, and you've made a profit.

SPEAKER_02 15:50

Yeah, and then you look for something else which is is good. So you've achieved what you want it to. So interestingly, generally with our portfolios, we get higher turnover when they're really performing well, and lower turnover when they're not doing so well. And that's just a feature. So if you see value doing well and the turnover goes up, it's generally a good sign.

SPEAKER_00 16:11

Do you ever get emotionally tied to a stock? You know, you say, Oh, we like it, but we have to sell it.

SPEAKER_02 16:19

No. There are companies I like, there are businesses that I think um are very, very good. Funny enough, I've always had a soft spot for drax. I think because driving, when you go north, driving by those huge chimneys, and I think what they tried to do with with moving away from coal to biofuels was very, very um, very clever. But no. You have to remember the only people you should have an emotional attachment to is your investors. They're the ones that are paying you to do your job. So just because you happen to like a particular company doesn't mean you should get emotionally attached to it. Very, very good one. Royal Mail, I really liked. I thought they had a fantastic opportunity. In fact, they should have done really well because you know, delivery systems and all the rest of it, they were well placed to benefit from that. And their management was saying, you know, we need to be, we need to change from being a letters company that delivers parcels to being a parcels company that delivers letters. Then they had a change of management. Um I think Simon Thompson came in, and we didn't like the management. So, how much we like the business, we canned it. Absolutely right thing to do, by the way. Um, so there are some times when you don't like something about the business, you might make that decision. But just because you do like it doesn't mean you're gonna breach your own rules and buy it or keep it.

SPEAKER_00 17:54

Crack on with the job. Gary, I want to bring it, bring it a little closer to home and and and try and tie up if we can. All of this conflict courts funds have had great returns over the last 12 months. We saw that coming into the new year, announcements at the client seminars. What impacts have the current conflicts had on those returns? What kind of a dint has it made? Because we know markets, everything's going down, apart from prices which are going up.

SPEAKER_02 18:21

Yeah. So we've had a phenomenally good year. Um it's been a you know a great year for the funds, generally across the board. As the value ethic came back into the markets, we did well. And the you know, as I put that chart up at the December seminar, we'd managed to outperform the Mag 7, and our growth fund had through through the 11 months up to the end of end of November last year, and then we we've continued to outperform. We've lost a little bit of the extent of that outperformance through what's happened in Iran, and the reason for that is that the American stocks have done better. Um, and uh in turn, that's because that America is self-sufficient with energy, you know, it it produces about 20 million barrels a day of oil and consumes about 19 million. Incredible achievement. It's done that over 25 years, you know, it's added a massive uh additional amount of capacity to to world oil. So American stock did better. They went off about 2% in the first week of the crisis, whereas the FTSE went off about six. So we lost a little bit relative, but since then it's sort of it's calmed down a bit, and we take it more as a buying opportunity because we don't think the arguments for for tilting away from the big AI-driven companies has changed, and it's certainly paid off for us in the last year, and we'll lean more into that. So we treat this as a an opportunity to continue with the policy. So, if you like, in summary, it took the cherry off the cake and perhaps a spoonful of icing, but not much else. It's still been a good cake for the last year.

SPEAKER_00 20:08

Turn it upside down, and what we're actually looking at is not a not a reduction in the in the returns, but you're actually looking at the um effectiveness of the shock absorption, if you like, as a result of the value and the diversification combined.

SPEAKER_02 20:24

Yeah. And the the nature, the way we position, perhaps we had less shock absorption than if you'd just been invested in the SP 500. But that's always going to be the case, Leo. There's always going to be isolated moments when your strategy doesn't work as well as something else. It doesn't matter what happens over a week or a month or three months or six months, it matters what happens over three, five, ten years. That's what matters because that's the time horizon for the clients that we're running money for.

SPEAKER_00 20:56

Clients being the subject of my last question, Gary, is there anything you'd like to say to our clients before we wrap this up?

SPEAKER_02 21:02

Well, wars pass, conflicts pass. I know this is difficult, and modern media means you're bombarded with images and comment, and media thrives on bad news much more than it does on good news. Um I think the thing to bear in mind is there are a stack of vested interests in bringing this conflict to an end. A stack, and I think for that reason it is likely to end. Now, I can't say with 100% confidence that that would make me a charlatan because who who knows? You can't predict the future with that type of certainty. But on balance, you'd have to say that's where you think things will go, and after that, I think you're back to the you get back to the basics, which is there's lots of cheap businesses out there, there's lots of Low priced assets, and there's lots of expensive ones around too, and we're less in the expensive ones and more in the better value ones, values you say, Leo.

SPEAKER_00 22:10

So Gary, thank you for the updates. Just a couple of weeks away from the end of the first quarter of 2026, where I'll then be catching up with the rest of the team, but Jake and James to hear how we've performed and how markets have behaved through this first and fast quarter. Thank you very much. If you have any questions, please do speak to Advisor or contact us via the website. Thank you.