James HesterOil investing has become a hit and miss affair, especially given the precipitous decline in oil prices over recent years.
While oil was trading at over $100 a barrel just three years ago, these days traders get excited if the black stuff manages to claw its way above the $50 per barrel mark.
Oil stocks can provide investors with effective exposure, but should investors now steer clear of oil altogether?
Along with the widely cited current glut in the market, there are also longer-term issues hanging over oil, such as the rapid rise of green technology.
Oil worries
When assets are in the doldrums and confidence is low, canny investors can often pick up bargains. Right now, there´s no doubt that oil is up against it.
Last year, OPEC unveiled landmark agreements to cut production, with non-OPEC producers such as Russia also pledging to cut output to boost prices.
But a decent run up in prices, that saw Brent oil futures rally from lows of around $30 per barrel at the beginning of last year to reach $57 per barrel in January 2017, has sputtered to a halt. Oil prices have stumbled year-to-date, with Brent currently trading around the $50 per barrel mark.
OPEC doubt
On the one hand, recent surveys have suggested that OPEC production has been rising of late, casting doubt over the organisation´s ability to make a meaningful dent in output.
There has also been higher production in North America. A revolution in oil drilling methods has seen US output rise, especially in the Texas Permian Basin, where fracking techniques mean US producers can now break even at lower oil prices – well below the $40 per barrel mark.
Then there are the longer-term concerns over the demand outlook. For instance, accelerating take-up of electric cars could weigh on oil prices over the coming decades.
Cautious stance
Big oil companies have been adopting a cautious stance over recent years, with many focusing on cost-cutting and asset sales as they have prepared themselves for oil prices to stay in a lower range.
While no one really knows for sure, few expect oil prices to return to the $100 level. Though $70 per barrel has been widely floated as a new possible price peak in the short term, this would assume the industry can quickly emerge from the current supply glut.
In February this year, investment bank Citi predicted oil could reach the $70 per barrel mark by the end of 2017. At that point though, there was also a lot more optimism in the market about OPEC´s ability to rein in output and push up prices.
Good results
That said, second-quarter results from the mega oil companies were generally good as three years of cost-cutting and restructuring efforts enabled some of the big names to beat earnings expectations.
Shell reported $3.6bn in second-quarter profits, a 245% surge versus the year-ago period. Likewise, France-based oil major Total also exceeded second-quarter earnings forecasts, reporting adjusted net income of $2.47bn, 14% higher than the year earlier.
Both companies, however, saw a squeeze on profits versus the first quarter of 2017. Even with the best management in the world, if you´re an oil producer and prices fall, you´re likely to see some decline in the bottom line.
Year-to-date, Brent crude oil futures have eased from around $57 per barrel at the beginning of the year to $52 per barrel today, a fall of 9%.
Correspondingly, Total´s shares have slipped by 10% this year, while Shell´s stock is trading around 2% lower.
Peak oil demand
One of the things that both firms have in common is that they are increasingly gearing up for a point where demand for oil peaks as the world moves further towards greener technology and renewable energy.
