The price of a barrel of oil, and subsequently other fossil fuels whose value closely track that benchmark, has eased significantly over the last few months even if volatility has remained a feature. At $91.30 a barrel, Brent crude prices have fallen by almost 25% since the highs of March and the most recent peak of around $121 set in mid-June.
Despite the continuing supply crunch, fears of a global recession have dragged oil prices to comfortably back below $100. Natural gas prices remain elevated but have also recently eased.
Oil and gas producers, traders and providers have all benefited considerably from the high prices over the past year. Shell’s share price is up almost 57% over the last 12 months and BP 47%.
Energy services and utility company Centrica, which owns British Gas, has also benefited from the high prices with its market capitalisation soaring by almost 60% since this time last year.
There’s been plenty of controversy and discussion over the morality of shareholders in energy companies profiting handsomely as a result of soaring fuel and power bills that individuals, families and businesses are struggling to meet.
The most obvious argument against windfall taxes on outsized profits is that nobody was calling for energy companies to be compensated when oil and gas prices have collapsed and their margins squeezed. And that it’s the profits realised during the good times that allow for investment in increasing future supply. And the huge investment in developing renewables capacity and meeting net zero targets being demanded of western oil and gas giants like Shell and BP.
It’s a complicated discussion and not one we will dig deeply into here. But the fact of the matter is investors in oil and gas companies have done very well over the last year.
Have oil and gas prices and stocks peaked?
However, with fossil fuel prices in a generally downwards trend over the past few months despite continuing volatility, and economic consensus relatively convinced much of the developed world will experience a recession, it would be easy to presume oil and gas stocks have already peaked. Valuation gains over the last year have been spectacular and lower prices for fossil fuels over the last quarter will inevitably feed through into lower profits for the companies that produce and sell them.
Investors who own oil and gas sector investments could well be considering locking in at least some profit at this stage. And those who haven’t had exposure to the sector over the past year could be forgiven for presuming the moment has come and gone.
But is that really the case?
Why experts are convinced oil and gas prices will be high for years
The consensus among oil and gas market analysts is that prices may well rise again into the winter and remain elevated as an at least mid-term trend. If that indeed turns out to be the case there could still be plenty of upside left in the sector for investors. But why do analysts increasingly expect an extended period of higher fossil fuel prices?
If the last year has taught us anything about energy markets it is that we are still a long way away from renewables being a big enough part of the global energy mix to to put a ceiling on fossil fuel prices. If supplies of the latter are in any way compromised, or there is a risk they might be, prices go up.
Not only have we seen prices leap but the conditions that once kept a fairly firm price ceiling in place for energy commodities look to have changed. During previous oil and gas supply crunches, at the point prices looked like they might move up to a sustained level that would encourage the big Western producers to invest heavily in increasing production capacity, rival producers like the OPEC countries would increase supply.
But as global energy consumption has increased against a backdrop of under investment over the past decade due to relatively low prices and the push towards renewables, that excess capacity has been largely exhuasted. The OPEC producers can no longer simply open the taps wider to bring prices down.
The West’s discouragement of investment in fossil fuel production also means Opec countries no longer need to keep prices low to put big oil companies like BP and Shell off investing in increasing oil and gas production. We are locked in to buying from OPEC countries even when prices are high so there is little incentive to not leave them there and make hay while the sun is shining.
Leading analysts are convinced the timelines given by politicians for weaning ourselves off fossil fuels and renewables contributing the lion’s share of the energy mix are unrealistic. If markets reach consensus with that view there will be a clear case for an extended bull market for fossil fuels.
For oil and gas prices to move back up again after a few months of prices easing would also be far from a unique scenario in an historical context. There were seven corrections of up to 15% or 20% during the fossil fuels bull market in the 1970s and between the commodity bull market of 2001 to 2008 prices fell by at least 10% on five occasions.
That suggest there is a high chance that it is far from too late for investors who do not yet have exposure to fossil fuels to profitably do so.
Oil and gas investment ideas
There are a number of ETFs that offer diversified exposure to the oil and gas sector, including:
- iShares Oil & Gas Exploration and Production UCITS ETF
- iShares MSCI Global Energy Producers ETF
- SPDR® S&P Oil & Gas Exploration & Production ETF
- Energy Select Sector SPDR® Fund
- Invesco S&P SmallCap Energy ETF
An alternative to the big listed energy companies including BP, Shell, Shevron and ExxonMobile suggested by MoneyWeek is Nasdaq-listed Golar. The company, worth just shy of $3 billion, designs, builds, owns and operates marine infrastructure for the liquefaction and regasification of LNG.
It owns two FLNGs (Floating LNG vessels that recover, liquefy, store and transfer LNG from subsea wells) as well as 31% of the gas carrier Cool Co and 6% of LNG supplier New Fortress Energy.
Global demand for LNG tankers is expected to remain strong in coming years as the EU and other nations source alternative suppliers to Russian gas. The risk is the size of the world LNG tanker order book, which stands at 38% of the current operational fleet which would significantly increase supply however shipbuilding capacity bottlenecks mean that some of these ships may never be delivered.
However, in mitigation of this risk, Golar has recently restructured its balance sheet and now has cash and listed securities worth $500 million. The companies expects the Ebitda of its FLNG assets to grow by between 300% and 400% between 2021 and 2024. The stock also looks cheao on a forward p/e multiple of 13 to the end of December 2023 and 12.4 to the end of December 2024.