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The two things Oil investors need to know now; and is it a good buy?

Equities 6 minutes to read
Jessica Amir

Market Strategist

Summary:  Oil prices have been skyrocketing until they recently plunged into a bear market, falling 20% from June, to where they are now, about $100 a barrel. Despite this sharp pull back, oil stocks all over the world are still some of the best performers this year, supported higher in anticipation of growing earnings. Cast your mind back to just two years ago. The oil price plunged to US$20 a barrel, thanks in part to the coronavirus and a bruising price war. Here we discuss the two things oil investors need to know now, and also question if oil and oil stocks are good buy.


The two key considerations for oil right now;

Firstly

Oil (OILUKSEP22 & OILUSAUG22) has fallen from ~$140 in March to where it is today as China, the world’s biggest oil importer and commodity consumer ramped up its covid restrictions and mass testing. lockdowns. Recently, a one single covid case shut down one of China’s steel hubs for three days, while in Macau, the gambling hub, it’s been shut for a week. Basically, as long as there are covid cases, a zero covid stance, oil remains pressured. Meanwhile, oil has also fallen off its high on recessionary fears. But now we think, the oil price could be showing signs that selling is easing, click here to read Ole Hansen, Saxo’s Head of Commodity Strategy’s recent report.

Secondly

You need to consider, Oil’s outlook is getting dimmer for consumers and business. But for investors and traders there is opportunity ahead. Why? Well OPEC suggested global crude demand will exceed supply by 1 million barrels a day next day next year, meaning they see no relief in sight for supply. This is something at Saxo we’ve been warning markets of for some time and guided to in our Q3 Outlook.

Investors in oil stocks like Occidental Petroleum (OXY) may be particularly pleased, with shares in that company up 97% since January, while Exxon Mobile (XOM) shares have climbed 38% and Woodside Energy (WDS) is up 37% year to date. While the Tech heavy Nasdaq is down 22%, the S&P500 is down 14% and Australia’s ASX200 is down 11% YTD.

For years, we’ve been hearing that that world is about to arrive at “peak oil”, and that demand for it will soon drop as green energy sources take precedence.

While that is true on some accounts, the world has not transition in time, so demand for fossil energy will likely grow at a quicker pace for now. It’s also worthwhile to note, oil is entrenched in almost every aspect of our daily lives, and this remain the case for at least the next decade.

Oil tends is used for a lot more than just petroleum - energy needs. Petrochemicals, which are made from oil, are crucial ingredients used in society. From being used in the medical industry, to plastics, to food preservatives, cosmetics, glass, carpet, and even fertilizers. Products that include petrochemicals range from; golf bags, toilet seats, shampoos, crayons, footballs, candles, cameras, and tents, just to name a few. Also consider, even environmentally friendly means of transport, such as bicycles and electric cars used components made of plastic which are made of Petrochemicals.

So yes, whilst there is a shift towards renewables, oil stocks remain a solid long-term investment. The only question is, when is the right time to make it?

As we all saw in 2020, and from 2014-15-when a supply glut flooded the market, the oil market is enormously volatile; with unexpected booms and dramatic busts. So, while Russia’s invasion of Ukraine was another catalyst for crude prices soaring this year, a sudden loosening of trade sanctions, or for that matter, a global recession, could case the oil price to fall further and stocks plummet.

So, how should one potentially approach invest in oil?

We suggest you ask yourself some questions before investing:

  • What is happening in the world?
  • Is the situation expected to persist?
  • Can the stock weather the storm?

With oil prices being so volatile, the larger players should be better equipped to handle drastic changes in the market. That being said, as the oil price fell 20% from June, many oil stocks fell from their highs and could face further selling before oil demand picks up in China, which will support the oil price moving higher again all while oil supply remains critically short.

Therefore, if you are looking to invest in oil this year, we think it may be best to confine yourself to the major players in the league like Occidental, Exxon Mobil, Shell, BP, Woodside. Companies like these have strong balance sheets, rising free cash flow and earnings growth, with revenue measured in the billions.

In a nutshell, as long as oil continues to be an essential part of our daily lives, these companies should continue to thrive over the longer term.

Find out more about what is happening in the commodity space here.




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