Sentiment for oil could very well surge again this fall as quickly as its recently plunged

The futures price of WTI oil has fallen from 124 to 90 in just one month. This is despite a relatively solid consensus on a long-term shortage of oil. The price is all the way back to the level that prevailed before Russia's invasion of Ukraine. It may seem reasonable to consider only the war itself, especially if one considers the increased likelihood of recession in the United States and Europe. In the short term, the movement is therefore not surprising in itself. It is rather exactly what one can expect from how increasingly shorter news cycles drive financial markets. First, the price rushed because of the war.

Right now, the narrative instead consists of fighting inflation, quantitative easing, rising interest rates, economic slowdown and the fact that the battle for Ukraine may not really have affected the global supply of oil and gas that much. Equally, sentiment may turn to a focus on Germany's winter heating needs, closed nuclear power plants, an OPEC signaling that high oil prices are welcomed rather than combated with increased production quotas and long-term continued low investment in oil exploration due to its ESG status. The world is still four-fifths dependent on coal and oil for its energy needs. This means that demand for oil is increasing, despite all investments in renewable energy, while supply is declining. Also, do not forget that US President Biden is draining the country's strategic oil reserve (SPR) as soon as he can to fight Russia and the oil price at the same time. His advisers have probably explained that the two are public enemies 1 and 2, so here we talk about advanced voice fishing for a while.

If you just look up a little later this autumn, the situation may be completely different. In August and September, the most important midterm elections are held in the United States. After that, Biden can refill his SPR again when the votes are cast. In November, Xi Jinping is named China's Evergreen Leader. After that, China could afford to become more active in a number of areas after sitting still in the boat ahead of Xi's appointment. The changes may include how the country is handling the Covid pandemic, the real estate crisis and growing discontent and demonstrations. Maybe you open up the country and stimulate more again. If nothing else, the closer we get to winter, the more we may see economic slowdown in the US, declining inflation, and increased potential for a new Powell Pirouette or at least a break in interest rate hikes.

This reasoning leads to the oil sector. ConocoPhillips is valued at today's 78 USD at 8.5 times the profit. At USD 81, industry colleague Exxon Mobil is valued at 14 times the profit and Chevron (133 USD / share) at 13 times the profit in 2021. Both Chevron and Exxon are valued at only 7 times the next 12 months' profit forecast and Conoco at just over Price / Earnings = 5 . Obviously, the market has been dragged along in the negative narrative, and the earnings forecasts have not had time to be adjusted downwards in line with the rapid fall in oil prices in recent weeks. But I do not think the forecasts will go down very much either. Maybe not at all. On the contrary, the oil price can rise again as fast as it collapsed, or even more so when supply shortages meet winter and Russia's embargo. Then the profit estimate should not go up, i.e., in practice the P / E ratios are even lower than 5-7 for the large American oil companies.

Of course, it's always nasty to catch falling knives, especially considering how fast and high stock prices rose from the bottom in the fall of 2020. Conoco's stock rose almost 400% in price from around $ 25 to $ 125. Now that the price has quickly dropped to close to $ 75, I understand the instinct to stay away. It can feel like the downside is enough all the way to the starting point of 25-30 USD. But in the other scale is a valuation of only 5 times the annual profit for Conoco, despite high inflation, a shortage of supply and a restrained, price-friendly OPEC. Not even double today's rate, i.e. 155-160 USD would be anything but a reasonable valuation.

Of course, there are risks in the form of penalty taxation, for example, but I do not think that is a relevant risk until much higher rates and gains. Biden's more socialist party comrade AOC (Alexandra Ocasio-Cortez) is, after all, still not president and will probably not be until 2028. Then, on the other hand, it may be time to phase out the holding in oil shares. Partly due to AOC's policy, partly because renewable energy sources and various storage methods have been expanded six years longer than today. Until then, however, it looks like an open goal for Conoco et al., given the world's focus on energy, but also on inflation and growing conflicts globally. I see the correction in oil prices and oil stocks as a highly temporary effect of the news cycle. Everything else would be very strange when inflation is at its highest in the 1980s and growing geopolitical tensions are causing friction in all global trade, not least with regard to oil and gas. 

Karl-Mikael Syding