News & Analysis

Is oil a good investment?

01 Sep 2021 | by: Patricia Miller

Is oil a good investment?

Following a recent fall in oil prices and oil being in short supply due to a surge in COVID-19 cases worldwide, sentiment for the market was on shaky ground. But after a seven-day losing streak, oil prices have jumped, breaking the longest losing streak since 2019.

The West Texas Intermediate (WTI) oil price has been steadily rising year-to-date and has remained above $60 a barrel since mid-April. Today it’s approaching $65 a barrel and there are many reasons to believe this will continue.

Brent crude oil is the global benchmark, while West Texas Intermediate is the US benchmark. Brent crude has peaked above $70 a barrel and now sits at $67.

This encouraging rebound has increased the interest from investors in oil, with many now asking themselves should I invest in oil stocks?

Fundamentals of oil stocks

The rising Baker Hughes rig count in the US is 503, a massive 249 change from August 2020. This should signify more confidence in future oil prices as the rigs wouldn’t be operating without the likelihood of rising demand.

And many signs are pointing to rising demand. With China, the US and parts of Europe recovering from the pandemic, an increase in demand for oil is beginning to show. But that said, there is mounting pressure for oil companies to go green.

ExxonMobil is the ultimate in US Big Oil conglomerates. It’s the largest direct descendant of Standard Oil which was founded by John D. Rockefeller and Henry Flagler in 1970, and at a recent shareholder meeting two activist investors were appointed to its board of directors, rallied by activist hedge fund Engine No. 1.

Less agreeable to climate change initiatives than its European peers, ExxonMobil has so far agreed to spend $3 billion on green energy projects over the next five years. Meanwhile, it will spend around $100 billion on its oil projects.

Then there’s Chevron, another US Oil Major facing rising pressures to go green. While Chevron has pledged to reduce its carbon emissions, it’s not yet committed to achieving net zero long term.

But shareholders recently voted 61% in favour of a proposal to cut emissions from its products. Again, this is a surprising move that shows pressure to go green is mounting.

What is the Bull case for oil stocks?

Oil stocks typically deliver high-profit margins making them attractive to investors, in addition they also provide steady dividends during periods of high oil prices making them favourable for income-focused investors.

As crude oil prices increase, so does oil companies’ cash flow. Giving them more money to drill additional wells and grow their output, repurchase stock, repay debts and pay dividends, all of which create value for shareholders.

Dividend payments from oil stocks tend to be quite a bit higher than average due to the cash flow oil companies can experience when oil prices are high. This is one of the main reasons why investors looking for high dividend yields look to oil stocks.

Without a doubt oil plays a crucial role in fuelling the world’s economy and also in manufacturing products such as plastics, polyurethane, solvents and other intermediate and end-user goods.

With the shift to renewable energy gaining momentum it is expected that one day the use and therefore the demand for oil will decline in favour of renewables, but for now at least the world will continue to rely on fossil fuels.

What is the bear case for oil stocks?

The global shift towards electrification and a drive to meet climate change objectives is bringing ESG investing to the fore. ESG stands for Environmental, Social and Corporate Governance each of which an organization must strive to consider when operating. This has led to a rapid increase in ESG funds for institutional and retail investors to buy into.

It’s also leading governments to pressure oil majors to divest their oil producing assets if they want to have any hope of meeting their climate change objectives in a shift to renewables.

In recent weeks major US universities have pledged to stop all fossil fuel investments and move into renewables. Simultaneously, oil is also coming under attack as a major culprit in single-use plastic pollution.

These announcements are driving home the ESG message and putting pressure on businesses to comply. As the world shifts to renewable energy in the next 10 years and beyond, it remains to be seen how this will impact oil stocks.

Should I invest in oil stocks

As a fuel with a limited life span as the shift towards renewable energy continues to drive forward, oil may seem like a risky investment. And as with any investment it can be a risk. But our reliance on fossil fuels is expected to continue at least for the short term, so investing in oil could be beneficial, particularly for investors that are looking for high dividends that can provide an additional income.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Patricia Miller does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Patricia Miller has not been paid to produce this piece by the company or companies mentioned above.

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