Oil sprung higher this week, given a new lease of life by promising vaccine news. The oil price gains make beaten up Big Oil stocks worth another look.
Must know
- Oil rallied 10% on Monday at the same time stock markets hit all-time highs in reaction to the news of Pfizer’s successful vaccine trials
- Big Oil stocks, which tend to correlate strongly with the price of oil also saw big gains after a period of huge underperformance
- Definition: find out which stocks are in Big Oil
- Read more to find out the opportunities and risks of investing in oil stocks
Define: Big Oil
A name used to describe the world's six or seven largest publicly traded oil and gas companies, also known as supermajors. - Wikipedia (May 2020)
Chart
We have compared the share prices of 6 top global oil companies with the S&P 500 as a global benchmark:
Big Oil Price Performance Chart (3-months)
Oil stocks have bounced back with double digit gains from a 3-month period of massive underperformance but are still down over the period and continue to underperform the S&P 500 index as a benchmark.
What’s happening?
It has been one of the most dramatic years for oil markets ever. From demand destruction caused by the coronavirus to the Russia-Saudi price war to US crude prices turning negative to higher prices as the economy rebounded again. While the price of the commodity has been volatile, the stock price of energy companies has headed in only one direction – lower. Not only is the price of oil unreliably volatile, making oil project planning nearly impossible but these energy companies face the challenge of an increasing shift away from their fossil fuel products to alternative sources of energy.
However, this week the price of oil skyrocketed - as did the share price of the big oil companies on the hope that Pfizer's vaccine, found to be effective in stage 3 trials will enable economies to fully reopen more quickly.
The opportunities
- Tactical trade. Even if you believe the oil sector is undergoing a secular decline amid the switch to green energy - there is still a case to buy oil stocks based purely on stretched price dynamics. Oil stocks are underperforming benchmarks by so much more than historical norms that there at some point has to be a snapback towards the means. The gains in oil companies this week represent some of this snapback but there could be more to go.
- Reflation trade. The global economic outlook looks much brighter with an effective COVID vaccine. a strong economy naturally translates to higher higher oil prices as demand for energy increases with industrial activity.
The risks
- Negative prices. The market has come a long way from the negative price of WTI crude oil futures prices hit in April. but the conditions that created that price shock are re-emerging through second lockdowns in Europe, potentially followed by more in Asia and the USA.
- Dividends. Oil companies went from being some of the best dividend investments to some of the worst by slashing dividends this year.
How to play it
Big Oil stocks
BP = BP (UK)
CVX = Chevron (USA)
ENI = ENI (Italy)
XOM = Exxon Mobil (USA)
RDSB = Royal Dutch Shell (UK / Netherlands)
FP = Total (France)
SPX = S&P 500
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