Pumped up: the winners and losers from dearer oil

If the cost of oil remains high, the knock-on effects will be serious and wide-ranging, says Jenne Mannion

Oil companies such as BP are obvious beneficiaries of the surging crude oil price, but there are far more stock market losers than winners. The crude oil price has touched around $40 (£22.60) a barrel in recent weeks, its highest point since October 1990, when Iraq invaded Kuwait. This recent spike represents a 22 per cent increase this year.

Oil companies such as BP are obvious beneficiaries of the surging crude oil price, but there are far more stock market losers than winners. The crude oil price has touched around $40 (£22.60) a barrel in recent weeks, its highest point since October 1990, when Iraq invaded Kuwait. This recent spike represents a 22 per cent increase this year.

Joe O'Donnell, a private client stockbroker at BWD Rensburg, says: "The higher oil price is good news for oil companies but bad news for almost everybody else."

Higher oil prices have a three-pronged effect on the economy. The immediate impact is the higher prices at the petrol pumps, coupled with more expensive heating bills, leaving consumers with less disposable cash. Consumers therefore spend less on goods and services and companies feel the pinch on profits, which are already under pressure because their raw material costs have surged.

Ultimately, the rising oil price pushes up inflation as businesses increase their costs. To keep this in check, central banks respond by increasing interest rates. Certainly, the higher oil price, combined with fears of interest rate rises, led to jitters in global stock markets this week.

While the oil price has a detrimental effect on the broader market, there are some sectors that will benefit or suffer more than others.


Airline companies are among those to feel the high oil price pinch particularly hard given their high usage of jet fuel, which has risen in cost by 58 per cent in the last 12 months.

Analysts at Goldman Sachs this month reduced their earnings forecast for British Airways and SAS Group, the Nordic region's biggest carrier, citing increased fuel costs. Dresdner Kleinwort Wasserstein also downgraded its earnings forecasts for BA.

Graham Campbell, a fund manager at the investment boutique Edinburgh Partners, says: "Airline companies sell their tickets in advance, yet aviation fuel prices have gone through the roof. This will have a negative impact."

Indeed, the rising fuel price has contributed to recent profit warnings from the budget airline easyJet. This was just the latest in a series of blows from the budget airline sector. In January the Dublin-based carrier Ryanair delivered its first profit warning, and this month the Birmingham-based budget airline Duo went into receivership.

Some airline companies are endeavouring to mitigate the effects of the rising fuel prices by passing on the costs to customers. BA has imposed a ticket surcharge of £5 on round-trip fares sold in the UK. In markets outside the UK a $4 surcharge is being added. Australian-based Qantas has adopted a similar strategy; but low-cost airlines say they have no plans to impose additional fees.

While most investment professionals are negative on airlines because of the higher fuel prices, there is a flip side to this coin, according to Graham Ashby, a fund manager at DWS Investments. "Some airlines look quite attractive on a valuation basis. We are looking at easyJet, for example, as the share price has fallen substantially following the recent profit warning," he says.

General transport stocks will also feel the pinch. Mr Campbell says companies such as Exel, which is involved in air freight and contract distribution, will likely see its profits suffer from higher distribution costs.

A less direct effect is that companies which rely on consumer spending will feel the pain of higher oil prices as disposable income dries up, says Mr Campbell. Those that will suffer most include consumer-oriented stocks such as leisure and hotel companies, and retail outlets. "Companies like Dixons, the high street electronic retailer, will clearly struggle if customers are not spending," he says.


The obvious winners from the high oil price are oil and gas companies, such as BP and Shell, and smaller stocks such as Cairn Energy. Over the year to 10 May, the FTSE Oil & Gas index has gained 6.25 per cent, while the broader FTSE All Share index has fallen by 0.28 per cent over the same period.

Although Shell has been mired in controversy for overstating its reserves, both it and BP have announced share buy-back programmes over the year to return surplus cash, resulting from the higher oil price, to shareholders.

Mr O'Donnell says a higher oil price will translate into higher revenue for the oil stocks, even if volumes remain flat. As much of their cost base is fixed this increase in revenue should lead to further rises in the share price, he adds. "As such, both of the UK oil majors, BP and Shell, should benefit from a sustained high oil price," he says.

While direct oil stocks have been the clear winners, investment professionals say there are hidden gems to be found in associated industries such as exploration and production, and companies that service oil firms. Mr Ashby explains: "These companies enjoy the knock-on effect of cash-flushed oil suppliers." One such stock is Rotork, an engineering firm that supplies safety equipment to oil companies.

Mr O'Donnell says BG is also an obvious beneficiary. "BG is more exposed to the exploration and production side of the oil market than the majors, and should be a more geared play on any sustained strength," he says. "Another stock worth considering is BHP Billiton. Although predominately a mining company, around 30 per cent of its profits come from oil exploration and production."

Robert Waugh, head of UK equities at Scottish Widows, says that, if the oil price remains high, the profits of exploration companies such as Expro International, Abbot and John Wood Group will also soar. "There would be a lot more exploration and development if the high oil price was sustained," he says. Mr Waugh however believes the oil price will fall below $30 within the next 12 months.

A less obvious beneficiary is the packaging company Bunzl. Ironically, this company uses a large amount of fuel in its manufacturing process, but is able to pass the cost on to the customer. "Bunzl is the dominant paper and packaging manufacturer for supermarkets and hence enjoys strong pricing power. Packaging companies obviously use oils to make the plastic, but because Bunzl has a strong market position, it can pass those price increases on to customers," Mr Ashby says.

Another stock in the same situation is Croda International, Mr Ashby says. This holds a group of companies that manufacture a diverse range of chemicals and chemical products for the pharmaceutical, personal care, food processing and plastics industry.

"You would assume that chemical companies would feel the squeeze as oil prices rise, but this is not necessarily the case. In Croda International's case there is such a shortage of capacity that they have been able to pass on the fuel price increases," he says.

John Hatherly, head of strategy at M&G, says higher oil prices could, less directly, lead to risk aversion in the market. "A sustained higher oil price will change the attitude to risk. Over the last year or so as equity markets have recovered, the perceived risk of recession, deflation and lower profits has diminished. The higher oil price could lead to a change in this view. Investors may look to a more risk-averse strategy move into stocks considered to be more defensive, such as utilities and beverages," he says.


Although it is widely conceded that oil prices above $50 would tip the world into recession, few fear the worst-case scenario.

John Hatherly says: "The mistake people are making is to assume that the oil price is going to go bounding away up to $50. It may succumb to some of the downward pressures that are being put on metal prices at the moment. China, for example, is the world's second-biggest user of oil and the government is making efforts to slow down the rapid growth in this country."

He says that parallels with 1990, when the oil price last soared and led to a global downturn, the economy is now in good shape.

"The economic background is much stronger than in the early 1990s - the worst you can expect is for the higher oil prices to shade the rise in economic activity slightly, rather than push the world into recession," he says.

Mr Hatherly says that in the UK, while petrol prices have risen, this is against a backdrop of soaring house prices, low unemployment and high consumer confidence. "It's going to take more than higher fuel prices to depress this mood," he says.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
Chuck Norris pictured in 1996
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
A voter placing a ballot paper in the box at a polling station
Arts and Entertainment
The Queen (Kristin Scott Thomas) in The Audience
theatreReview: Stephen Daldry's direction is crisp in perfectly-timed revival
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

    £20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

    Ashdown Group: Marketing Executive - 6 month FTC - Central London

    £25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

    Ashdown Group: Junior Project Manager (website, web application) - Agile

    £215 per day: Ashdown Group: Junior Project Manager (website, web application ...

    Guru Careers: Software Engineer / Software Developer

    £40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

    Day In a Page

    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'
    Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

    Flesh in Venice

    Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
    11 best anti-ageing day creams

    11 best anti-ageing day creams

    Slow down the ageing process with one of these high-performance, hardworking anti-agers
    Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

    Juventus vs Real Madrid

    Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
    Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

    Ashes series looks a lost cause for England...

    Whoever takes over as ECB director of cricket, says Stephen Brenkley
    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power