Oil and gas giants BP and Shell both posted storming results for 2021, showing that oil has not been totally dismissed in a climate-conscious market just yet.
The UK mega-caps are leaders in the oil sector and have completely turned around their performance after a rough couple of years.
BP posted a profit of $12.8bn (£9.5bn) for 2021 after oil and gas prices surged in the second half of the year, while last week rival oil giant Shell reported profits of $19bn on the same day energy regulator Ofgem announced that UK householders should expect a 54% rise in their domestic energy bills as early as April.
These strong results were not a surprise to Chris Beauchamp, chief market analyst at IG Group, who said that BP had gone from “famine to feast” as demand has surged.
The need for oil went through an extended drought, triggered by the Covid pandemic and the subsequent lockdowns, which halted all domestic and international travel, crashing the demand for oil overnight. It was driven down further by a Russia/Saudi price war pushing the futures price for a barrel of Brent oil into the negative, leaving suppliers essentially paying buyers to take it off of their hands. The spot price at this time was in the teens.
That story is completely different today though with spot price of Brent oil dancing around the $90 a barrel mark and some managers expect it to breach $100 this year.
There were several drivers behind this, including the resumption of travel and re-opening of factories, which has pushed up demand at a time when supply is being constricted to increase the price.
Yet oil and fossil fuel companies are being confronted with an expiry date on their products as the world focuses on a transition to renewable energy sources in a bid to tackle climate change, putting them at an crossroads.
Stocks, including Shell and BP, have not been investing in long-term projects as a result, which has led to a drip feeding of existing supply. This is despite a goldrush of cheap oil infrastructure becoming available last year when several energy suppliers folded and the likes of Shell and BP scooped up the remains at a major discount.
For investors, oil is one of the most pivotal areas to look at when analysing key metrics such as inflation, which will in turn influence central banks' policies.
James Penny, chief investment officer at TAM Asset Management, said: “Oil is, for the first time, permeating a lot more than just the oil market. It seems to be the lead driver on inflation which is feeding into central bank rhetoric around being hawkish to control inflation, which in turn is feeding into this value resurgence playing out in markets.” In a way, oil is one reason why the S&P “had one of the worst starts since World War II”, Penny said.
In this environment many stock pickers are bullish on both Shell and BP, even if markets are moving towards ethical investing, a trend which drove the majority of inflows across markets last year.
Ben Yearsley, Fairview Investing’s co-founder, said investors should be backing the oil trade as well as more environmental and social (ESG) options.
“Should you be investing in oil when the world is trying to decarbonise? The simple answer is yes,” he said.
The reliance on oil is not going away overnight since the infrastructure for widespread renewable energy supply is still decades away, so it is important to be invested in the current oil drive but also take an allocation to where the world is moving towards.
Yearsley said he was bullish on oil generally, but especially Shell and BP over the long term. This is because they will still be the leading energy suppliers in the future, as they are already diverting huge amounts of research and development into becoming renewable energy suppliers.
Yearsley noted that there were a number of active portfolios for exposure to oil and renewable energy, separately. On the first he highlighted Schroder Global Energy, run by Mark Lacey, which is intimately linked to the oil price. Riverstone Energy was another worthy of consideration, he said.
On the renewable energy side, Yearsley recommended Lacey’s other energy fund, the Schroder Global Energy Transition, which invests in the companies taking part in this energy shift. He also noted closed-ended options Renewables & Infrastructure, Greencoat UK Wind, and Gresham House Energy Storage were also top picks.