Oil and oil companies: a good vaccine or is it already too late?

Oil and oil companies: a good vaccine or is it already too late?

23. helmikuuta 2021 - Mikael Syding

The price of WTI oil has just recovered from the landslide that began a year ago. The front-month price is now again at 61 USD / barrel, 50 percent higher than the average for the second half of 2020. The rise is driven by hopes of a more normal summer season for road transport, "driving season", and by extremely low winter temperatures in large parts of the US.

Admittedly, so far only small Israel is leading the way towards a more open economy with increased mobility between and within countries. There, 33 percent of the population have already received two vaccine doses and thus immunity to Covid-19. But most significant economies are aiming, despite the start, looking more modest towards having given their populations at least the first dose of vaccine before the turn of the year. With a little luck, this means, for example, that international travel for both individuals and companies can be normalized this summer. With fewer restrictions for restaurants, nightclubs, music and sports events also comes reduced unemployment and increased optimism, which in turn drives consumption and travel (if quarantine periods are removed).

WTI oil, 5 years

Note: past share price is no reliable indicator of future development.

The oil company ConocoPhillips' share price has gone roller coaster in the past year, several times between about 50 and 25 USD / share. The latest tour is from $ 49 in June to $ 27 in October and $ 49 the other day. The price development has reflected the oil price but with a certain shift, which is described in the next paragraph. Exxon Mobil's share price journey looks almost exactly the same as for Conoco, with the last movement from just under 30 to just over 53 dollars. Finally, Chevron also shows the same pattern, but with a slightly smaller amplitude in the oscillations. As I said, the oil price is back at the level before the pandemic, but the oil companies themselves have 20-30 percent upside left if they are to make up for the entire decline. Obviously, there is some hesitation among investors. This may be due to a cautious attitude towards the long-term secular transition to a fossil-fuel-free society, or, for example, expectations that the travel habits of officials and private individuals have changed permanently in favor of more cost-effective digital meetings.

The share prices of the large oil companies are usually ahead of the oil price, sometimes significantly. A year ago, the prices for Exxon and Conoco peaked five days before the price of the WTI contract did so, ie in practice almost simultaneously. But the share price bottom was set a full month before oil temporarily found its ultimate bottom on negative prices April 20-21, 2020. The summer peak for oil companies occurred since June 8, two and a half months before the oil price peak on August 26. At the fall of autumn, however, the markets were largely in sync again, with Exxon and Conoco bottoming out (October 29) just a few days before the oil price (November 2).

Exxon Mobile, 5 years

Note: past share price is no reliable indicator of future development.

The question is where we stand now. The energy crisis in Texas last week clearly showed that renewable electricity is not yet ready to handle all types of weather. When extra electricity was needed for heating, the wind turbines stood still both because they froze and because it usually blew less when it is really cold. Prices rose by almost 30 times, which dug deep holes in the economies of both electricity companies with fixed-price contracts and customers with variable prices.

For the time being, unfortunately, only coal and oil can handle similar situations at short notice. And in the foreseeable future, only nuclear power can reliably and with minimal environmental impact take over the role of fossil fuels, but it will take time for a sufficient number of new nuclear power plants to become operational. Meanwhile, US oil production has fallen by 15% and Saudi Arabia is showing unusual production discipline, which could have a disproportionately positive effect on prices when the whole world starts up after 18 months of dormancy.

Energy forms the basis of all physical production and transport. It is thus one of the most reliable inflation hedges, which may soon prove extra valuable even if the central bankers still believe that deflation is the opponent. The conclusion is that if the historic global vaccination effort proves effective against the spread of Covid-19 and its various mutations, the rise in prices for both the oil raw material and oil companies such as Chevron, Exxon and ConocoPhillips will continue.

@Mikael Syding

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

22.1.2022 1:17:29


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