Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
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.
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.
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.
We suggest you ask yourself some questions before investing:
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.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)