There's opportunity where markets aren't interested – but you'll have to be brave
Those investors who run strict environmental, social and governance (ESG) screens can look away now, but oil and gas major Shell continues to do a job for portfolio builders and income seekers. The company's move to quash rumours of a bid for BP is helpful and the apparent disinterest of markets could yet prove to be an opportunity for patient contrarians.
Oil prices gained a little when tensions between Israel and Iran flared in late June before quickly shedding those gains upon the announcement of the ceasefire. In this respect, investors were right in their view that a wider conflict would not develop and that crude prices would not spike as a result.
As a result, oil companies' shares remain in the doldrums and near-term sentiment toward oil and gas prices remains broadly negative for three reasons.
First, the International Energy Agency (IEA) continues to assert that demand growth remains anaemic. It argues demand will increase by barely 720,000 barrels per day this year, a marked slowdown from the two-million-plus pace seen post-pandemic in 2022 and 2023. The IEA's latest forecast also assumes demand growth of just 740,000 barrels a day in 2026, thanks to a weak economic growth outlook (where tariffs and trade remain sources of uncertainty) and the increased adoption of renewable energy technologies.
Second, the IEA also argues that supply is plentiful, even with tensions in the Middle East. Global inventories are building at a rate of one million barrels a day, to stand at 7.7 billion barrels at the last count. OPEC+ continues to restrain capacity, too, so there is scope for increased supply here, especially in Saudi Arabia and the UAE. Meanwhile, American output continues to surge and stands near record highs of 13.4 million barrels a day, according to the US Energy Information Administration. This is largely thanks to shale, and it means that OPEC+ is not the only game in town.
Finally, Israel and the US left Iran's oil facilities untouched. If Iran were to suffer the loss of its production and refining capabilities, then it would have less to lose by trying to close the Strait of Hormuz, a shipping lane that carries up to a fifth of global oil shipments. If Iran has the capacity to still export two million barrels a day of crude, then cutting off its prime shipping lane would be an act of economic self-harm, and one that seems unlikely when the theocratic regime already has more than enough problems to deal with.
Investors are clearly taking all of this on board, resulting in oil and gas stocks continuing to drift sideways at best. They are little or no higher now than they were in 2022, even if headline equity indices continue to progress beyond past peaks.
This torpid performance means that oil and gas stocks continue to lose importance within the broader headline indices. Oil and gas producers represent just 8.8pc of the total stock market value of the FTSE All-Share index here in the UK, compared to a post-1995 average of 12.4pc and 2009's peak of 22.3pc. The low was 6.1pc in autumn 2020, after oil's Covid-inspired collapse.
Investors therefore seem more concerned that oil and gas fields will become stranded assets than they do about the risk of a conflict restricting or cutting off supply.
Yet the lowly valuations attributed to oil and gas producers may catch the attention of brave, patient contrarians.
Demand continues to grow and the globe continues to rely heavily on hydrocarbons, whether we like it or not. In addition, the best cure for low prices is usually low prices, because they fuel demand and discourage supply. Drilling remains subdued worldwide, according to the Baker Hughes rig count.
Meanwhile, America's Strategic Petroleum Reserve (SPR) still stands way below its 714-million-barrel capacity, and total inventory State-side is at its lowest level since late 1986, according to the US Energy Information Administration.
It might therefore be incredibly unlikely for oil and gas prices to surprise us with a spike, if even a quickfire war in the Middle East fails to move them. After all, the combined stock market valuation of Aramco, BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies is $2.9 trillion, a fraction less than Apple's $3 trillion price tag – even though the forecast aggregate after-tax profit for these producers this year is expected at around $197bn, almost double that of the Californian technology company.
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