So, China’s 85-day strategic oil reserve seems to be quite close to the IEA recommendation. Thus, China has managed its own interests reasonably well, while most countries have done poorly. Finland is doing even better than China, with reserves equivalent to about 5 months of consumption.
Considering the changes in global politics, it’s somewhat irrational that Helsinki’s rock caverns are being converted into thermal energy storage from their original purpose of oil storage.
Investing in oil companies is quite a gamble right now. The oil price jumps after every tweet. My own assessment is that the Strait of Hormuz won’t open for several months. And even if it does, there will be a shortage of oil and especially gas next winter. Well, money can buy both. Those who suffer will be found somewhere other than the wealthy West. But if only one could somehow estimate whether this means oil companies are still a good investment, or if everything is already priced in. If only I had a proper crystal ball.
In the big picture, looking back, oil hasn’t been in favor with investors in recent years; instead, it has been seen as a sunset industry in a declining market with waning interest. The incentive for investors in oil companies has been a high dividend yield, although even that has been a questionable incentive at times during periods of low oil prices.
As I see it, the sentiment has now turned. The importance of oil to the global economy has certainly become clearer. Prices are played up and down by tweets. The Strait of Hormuz drives the price up and down. Undoubtedly, over some timeframe, the market will normalize and the oil price will settle into parity.
However, I believe that the valuation of oil companies will continue to rise and their marginalized position in the investment market will disappear for several years, as the current shock will leave a clear mark on the investment market. It is likely that the current market price of oil will enable, in addition to a very attractive dividend yield this year and possibly next, a growing investment boom in oil exploration and recovery. There will likely be a transition in the green transition… I believe in the continued success of the energy sector, oil & gas, and their refining industries, even in the medium term. As a sector, I would say my view is at least HOLD.
Henri Huovinen has written about, among other things, the price of oil and its effects
Goldman warns that the economic consequences of rising energy costs are more significant than the market price of oil alone suggests. The bank also highlights the risk of potential US oil export restrictions, which would further widen the price differential between Brent and WTI.
Subheadings:
Traffic in the Strait of Hormuz still almost at a standstill
The United Arab Emirates is leaving the oil exporters’ cartel OPEC and OPEC+. Under normal circumstances, the country has been among the largest oil exporting nations.
That is a very strong view in a situation where the incentive to move away from fossil fuels is probably higher than ever and replacement technologies are better and cheaper than before.
Oil companies will certainly make strong profits as long as the strait remains closed. High prices also increase investments in new production. When the strait eventually opens, the new investments + Persian Gulf oil rushing into the market will again quickly collapse the price and, consequently, the margins.
You can certainly make returns with oil companies, but I would argue that the importance of stock picking is emphasized, as is the ability to hit the buy and sell buttons on time. Owning the entire sector with a buy & hold strategy, even in ETF form, would be daunting.
Oil companies don’t make investment decisions based on the price at a single moment. Especially at a time when a single tweet can swing the price by 10%. Investment decisions, especially larger ones, inevitably look further ahead, 10+ years into the future. So far, it has remained quiet even in the US drilling sector.
The price of oil is unlikely to drop immediately back to the $60 levels seen before the tensions. That situation will likely have an impact at least until the end of this year. We’ll see where we are in 2028. The price at that time will likely depend especially on demand growth this year and particularly next year, once the supply side has normalized. Currently, there is still some room for the price of crude oil to rise before it significantly impacts consumption, as there is flexibility in refining margins.
It certainly has a positive effect on the transition; when gas is expensive, an electric car seems more appealing.
Has it ever really been that unclear? I buy the idea that companies with lower risk and broad portfolios, such as Equinor and Chevron, can earn higher multiples, but I don’t believe the entire industry will be viewed in a completely new way or with high multiples.
True, which is why it’s hard to assume that the development of alternative bio- or recycling solutions would slow down as their relative competitiveness improves. In addition to environmental values, the popularity of alternatives can be increased by breaking free from the oil supply chain. Of course, even in an optimistic scenario, the importance of oil will persist for a long time.
Hyperinflation makes everything expensive—why would batteries, heat pumps, or bio-based products be an exception? Oil is, of course, needed as a raw material in many value chains. In energy, the share of fossil fuels is still important as well.
However, green transition technologies reduce the demand for oil. The fact that oil is part of the green transition’s value chains doesn’t explain why the importance of oil and oil companies would increase.
Let’s take the electrification of motoring as a practical example. Producing an electric car requires a massive amount of energy and production inputs, the rising costs of which we can probably agree on. If the price of an electric car is 100 today and 150 units in a couple of months, wouldn’t price elasticity lead to a slowdown or halt in the growth of electric motoring in the big picture? At least I won’t be buying an electric car…
Similarly, the cost of production inputs for internal combustion engine vehicles is rising. The difference is that fuel prices are rising significantly more than those of electricity.
So, the current market share ratio will likely remain in the big picture. Or then consumer purchasing power skyrockets and everyone buys a cheap-to-run electric car as soon as possible. I believe we will, however, mostly stick with the existing energy sources…
OPEC+ decided to raise its production quotas in the first meeting held without the United Arab Emirates. However, not all countries will likely be able to take advantage of this quota increase due to the crisis in the Persian Gulf, but there are many oil producers outside the Gulf that will probably seize the opportunity while global market prices are this high.
