Today we consider energy and oil and gas stocks once again.
While oil and gas prices have done a great deal over the last six months – up a bit, down a bit, then sideways – the associated companies have done very well: the producers, the service companies and so on.
Many years of bear market belt-tightening are now paying off.
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However, in my opinion, we are not yet at that point of excess and decadence that marks the end of a cycle – crazy mergers and acquisitions, insane valuations and Bacchanalian behaviour from the executive classes. So I venture today, as last week, that there is still plenty of gas left in the tank of this bull market.
With that in mind, I wanted to share a few charts with you today that give an idea of what is possible.
Oil and gas stocks are on the rise
The first chart shows the ratio between energy stocks and the rest of the market.
Indeed, without energy stocks there would not be a rest of the market. This a simple point that many, especially those who make policy, don't seem to understand. The world we live in today and the economic benefits we enjoy, relative to our ancestors, have been made possible by fossil fuels.
So here is the energy sector relative to the S&P 500. The higher the chart goes, the bigger the relative market cap of oil and gas stocks.
You can see that, even with the rally we have seen in energy companies since 2020, on a relative basis, energy companies are, give or take, where they were at the turn of the century, when oil itself was around $10/barrel and that secular bull market was only just getting started.
You can also see that we are in an uptrend. Energy stocks are increasing in value, while the broader S&P500 is flat or falling.
It’s also worth noting that the relative market capitalisation was almost three times as large in mid-2008 when oil went to $147/barrel.
The inference is that the bull market has a lot further to run.
Oil and gas stocks are cheap compared to the broader market
Next, the ratio between oil – West Texas Intermediate – and the S&P 500.
You would expect this chart to trend lower over time because oil production and extraction techniques should improve over time, while broader economies and the companies that operate in them grow.
Nevertheless, we are below the levels we were in the early part of the century. You can see how high this ratio went in 2008 – and how low in the corona panic of 2020, when oil futures, somehow, went into negative territory.
Relative to the S&P 500, oil is roughly where it was three or five years ago – I’d say it’s at its three- or five-year average. And it’s a lot cheaper than it was throughout that entire 2003 to mid-2014 timeframe.
So even with the gains of the last two years, oil does not look expensive relative to the S&P 500. It is at the cheaper end of the range. Another sign there is more gas left in the bull market tank.
Here's the price of oil relative to gold. These two – as hard commodities – tend to trade in a much tighter range over time, but my observation again is that it is in the low to middle of the 20-year range and not at one of those points of extremity whereby you might consider rolling out of one and into the other.
For sure we are nothing like where we were went oil went to $147 in 2008. In fact, we are below where we were for most of the 2000s. On the basis of this chart, oil is probably the cheaper of the two.
As regular readers will vouch, oil is a drum I have been beating since 2016 when it was $25 or so, declaring it our “trade of the lustrum”. A lustrum is a five-year period – a useful and underused word, I’d say.
That lustrum is now becoming a decade. We continue to beat the drum on oil, gas, coal and related oil and gas stocks. Fossil fuel demand will continue to grow until at least 2030 the IEA has forecast (2040 in the case of natural gas).
There is still a strong case for fossil fuels
That means it is not just enough to maintain current production levels; they need to increase. Yet there have been seven or eight years of underinvestment – leading to today’s shortages.
There are multiple reasons why production isn't keeping up with demand. ESG policies are deterring investment, capital is flooding into green energy-related companies rather than fossil fuels and the excesses of the previous oil bull market still needed to be purged.
Still, the market conditions remain good and I think oil and gas stocks will go higher in the long term.
I’m a big believer in narratives within markets. The fossil fuel story is only slowly starting to change. Many are realising just how important they are and what they have made possible. Indeed, there is a strong moral case for them, not against them.
But the narrative is not yet at end-of-cycle levels. When people start talking about Peak Oil again – that’s the sort of thing you want to be looking out for. The need for alternative energy sources is not because fossil fuels are bad, but because we have consumed them all.
I don’t know what the end-of-bull market narratives will be – that’s a story that is yet to be told. But if legislators and subsidisers start abandoning electric vehicle initiatives because the ultimate source of electricity remains the burning of fossil fuels, and it’s really quite inefficient, never mind hypocritical – that is one possible scenario
So hold on to your positions in oil and gas stocks – enjoy the ride.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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