Wakey Wakey

Just as things were starting to look up for oil companies, a warning from the world’s biggest energy agency last week gave them a rude awakening.

 

🕰 Recap

  • As demand for and the price of oil went into freefall last year, oil companies’ earnings followed suit.
  • This year, though, oil prices have been on the rise again.
  • That led the world’s biggest oil company, Saudi Aramco, to announce its highest quarterly profit in a year and a half earlier this month.
  • … only for the International Energy Agency to warn last week that energy companies ought to halt new oil and gas projects to keep climate change in check.

 

✍️ Connecting The Dots

Oil companies had a tough time in 2020. Oil demand tanked, sending the dusky nectar’s price – and with it oil companies’ earnings – into freefall. But things are looking more promising this year: the oil price has increased by 30% as the global economic recovery takes hold, in turn boosting energy companies’ earnings. Combine that with the long-awaited rotation away from high-growth stocks, and oil companies’ shares have the potential to outperform the wider stock market.

But there’s a bigger threat for oil companies than the pandemic: the transition away from fossil fuels. Green agendas were already set to accelerate globally, in part thanks to an eco-conscious US president leading the way. And last week the International Energy Agency added fuel to the fire, confirming that countries’ current policy pledges fall well short of what’s needed to meet the Paris Agreement’s key objectives. The only solution, according to the agency, is to put an immediate stop to new oil and gas exploration projects.

That wasn’t in Big Oil’s plan. While the likes of BP, Shell, and Total are working toward net-zero emissions, they’re also planning to seek out new fossil fuel fields for years to come. But seeing as the IEA’s recommendations often help both governments and the industry to plan their next moves, oil companies might be in for a reality check.

 

🥡 Takeaways

1. Shareholders are upping the pressure on Big Oil.

Oil companies are under particular pressure to set emissions goals in line with the Paris Agreement, since none of their current plans meet them yet. So with oil and gas majors on both sides of the Atlantic preparing to hold their annual shareholder meetings in the next few weeks, this is a chance for their investors to make it clear what they think. Enter Royal Dutch Shell, which put an industry-first – and hence closely watched – energy transition plan to its shareholders last week. And while the majority of its investors voted in favor of the plans, there’s a rapidly growing minority that insists they still aren’t enough to tackle the climate crisis.

2. Still, Big Oil stocks do have something going for them. 

According to investment bank Goldman Sachs, shares of energy companies are the best stocks to own as inflation accelerates because – among other things – commodity prices tend to rise in line with inflation. Higher demand for goods and services, after all, sends their prices – and, in turn, the price of the commodities used to produce them – higher too. Goldman Sachs, then, reckons that the oil price will end the year some 70% higher than it began. And since that could add 75 percentage points to the annual earnings growth of energy companies, it should be a boon for their stocks.

 

🎯 Also On Our Radar

Fresh US factory survey data this week showed that producers’ accelerating costs helped drive prices up to their highest level in 40 years. That might be pushing higher than US central bank’s comfortable with, and add to investor concerns that it might hike interest rates.

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