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Yesterday (23 October), Brent crude oil jumped 4% to over $65 per barrel, as renewed tensions between Russia and the US sparked a buying spree. Should additional restrictions on Russian oil companies and other oil-related sanctions from other countries follow, there’s potential for a larger, more sustained move in oil. As a result, I looked up some FTSE 100 firms that could do well from higher oil prices.
A prime beneficiary
First up is Shell (LSE:SHEL). The stock jumped 3% yesterday, highlighting its correlation with oil prices. Over the past year, the share price is up 8%.
As a company, Shell benefits from higher oil prices in a few ways. It’s an integrated oil major with sizeable upstream production, so higher oil tends to lift upstream cash flows and earnings. Put another way, Shell has direct oil exposure, so it naturally benefits when the commodity it produces rises in value. It also runs large trading and refining operations. So when there are sanctions-driven supply disruptions, it can often widen refining and trading profit margins.
Of course, a one-day spike in the price of oil isn’t going to translate to a large boost to the next quarterly earnings report. But if we see oil jump even further in the coming weeks, or even just hold at the current price, it could help to provide a more meaningful impact for Shell’s finances.
One risk is that oil prices are also influenced by OPEC+, the oil governing body. They have the power to adjust supply levels. If they do increase supply, it could act to lower oil prices again. This would then be a negative catalyst for Shell stock.
Indirect exposure
A second option is Glencore (LSE:GLEN) The stock rose yesterday but is down 16% over the past year. It provides a slightly more indirect way of expressing the view that oil will continue to rise. It’s one of the world’s biggest commodity traders and has materially expanded oil and gas trading volumes in recent years. So, although it has a diversified portfolio of commodities, a rally in oil prices would still act to boost profitability.
An added perk for Glencore versus Shell is that traders and diversified commodity groups (like Glencore) can profit from volatility and large price swings. So even if oil prices move higher or lower in a volatile fashion, it can make money on the price changes, not just whether the price goes higher. This is different from a producer like Shell, which relies more on upstream production prices.
A concern for investors could be coal. In contrast to oil, coal prices have been weak, which has hit earnings despite Glencore’s acquisition of more coal assets.
Overall, both stocks could do well if the oil price keeps moving higher, and so could be considered by investors.
