Are investors sure of an oil comeback?
12:37, 14 January 2022
Oil stocks have been shunned by investors and regulators but their shares are on the move. Royal Dutch Shell's stock price is up more than 20% up in the last 12 months to 1,815.00p while BP is 25% higher at 386.60p.
Are the ‘bad guys’ coming good again? Senior market analyst at Trade Nation David Morrison says it’s a complex, not to say crude, picture.
Omicron in support mode?
“Let’s make the assumption,” he says, “that Omicron could actually be a good thing, in terms of lower infections with a loosening-up of travel restrictions and the airline industry getting back more to where it was prior to the pandemic.”
“That’s a big area where you’re going to get demand, which has been very spotty. If we get that I can see oil demand continuing to pick up.”
Also, if the Organisation of the Petroleum Exporting Countries (OPEC) continues to – stubbornly – stick to quotas and keep any increases steady “we could,” Morrison continues, “see these oil companies easily gain quite substantially over the coming year.”
What is your sentiment on Natural Gas?
Not so fossilised returns
On 7 January Shell issued a fourth quarter update declaring that its natural gas business earnings will be “significantly higher compared to the third quarter 2021”, partly thanks to better supply chain and liquid natural gas (LNG) trading improvements.
New analysis from energy research and intelligence house Rystadenergy, released Tuesday, predicts global oil and gas investments will rise 4% to $628bn (£458bn), but this figure surges 14% higher in terms of upstream gas and LNG investments.
“These segments will be the fastest-growing this year, with a jump in investments from $131bn in 2021 to around $149bn in 2022.”
“Although this falls short of pre-pandemic totals,” Rystadenergy goes on, “investments in the sector are expected to surpass 2019 levels of $168bn in just two years, reaching $171bn in 2024.”
Audun Martinsen, head of energy service research at Rystad, told Capital.com that while the figures appear positive for some oil players, risk is still very much around.
Betting on black
Specifically, pricing pressures on inputs including raw materials and labour are sweeping across almost all sectors as inflation rears and central banks plot interest rate hikes.
“Steel prices will be high, labour is also quite high in terms of cost. There remain challenges with supply chains, moving people and equipment in various markets due to restrictions. So I think that the cost basis for oil and gas companies can [still] surprise.”
“I think,” he says, “the oil market might be a little too optimistic on oil prices. Not perhaps for the first six months of 2022 but maybe in the latter half of the year.”
Companies are beginning to drill again he says, especially in shale. “These increased activities will mean barrels in the market.” In other words, potential over-production risk.
Martinsen also cautions on the role of Iran and Libya, who may also decide to open the oil supply taps (last week Libya anticipated cutting production by 200,000 barrels a day though yesterday libyaupdate.com claimed production was on the up again).
Energy crunch tailwind
One guage to watch is the XOP exchange traded fund (ETF) which measures oil and gas exploration and production players. In 2021 it soared more than 60%. Even after this stellar run it remains significantly down on previous years.
The energy crisis is a following wind for fossil fuel companies with UK consumer energy bills likely to increase by as much as 50% in April.
Energy company share prices often track closely with the price of oil but some major fossil fuel companies match up better than others – Shell in particular says David Morrison.
“Looking at Shell and BP, Shell in particular, has really tracked the highs and lows of the WTI [West Texas Intermediate] price incredibly closely. It hasn’t quite made the [same] percentage gain. There are reasons for that – one of them is paying out dividends.”
A little frothy?
US oil production appears to be on the move. On Tuesday the US Energy Information Administration said output could hit 12.4m barrels a day in 2023, besting the 12.3m record in pre-pandemic 2019.
The Biden administration is trying to navigate a path away from fossil fuels but is also worried about rising gas prices for US drivers – a complex dance to choreograph.
“It’s uncertain where [oil] demand is going,” one analyst told Capital.com. “What we do know is that OPEC+ has the ability to push up supply quite substantially, but it doesn’t want to do that at the moment.”
“As far as the oil prices goes,” he said, “it does feel a little over-cooked.”
Read more: Why Amazon (AMZN) may have record digital ad sales this year
Markets in this article