When I think of ‘unstoppable’ stocks, old economy manufacturing and materials’ companies are hardly the first ones that come to mind. And especially not big oil. Yet, here we are. Consider this: the BP (LSE: BP) share price is up over 60% in a year and the Royal Dutch Shell (LSE: RDSB) share price has risen even more, by 80%.
And here is the rub. I think they have the potential to rise even more.
Crude oil price bonanza for these FTSE 100 producers
And we do not have to look very far to understand why. We just need to look at 2021’s oil price rally. Because of this, both BP and Shell have showed strong results, after a weak 2020 when all activity came to a standstill, especially travel. I was particularly heartened by their healthy earnings, which also bode well for dividends.
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Further, there is speculation that crude oil prices could touch $100 per barrel later on in the year, even if this rise is not sustainable. At any rate, it is easy to reason that oil prices will remain firm over the foreseeable, so oil producers can continue to do well for the next few years.
Pickup in activity and short-term shortages
The big reason for this is of course the moderation in the pandemic. If I look at just the numbers for the UK for instance, it is clear that it is coming under control once again after creating a scare last month.
This bodes well for economic activity. And in particular, this is good for travel companies, which have suffered the most during the pandemic. And since fuel is necessary for much of global travel, it follows that oil demand will remain strong. It can stay strong well into 2022 as well as activity continues to pick up pace.
In Britain, fuel prices have also spiked in the short run because of panic buying. As the shortage of lorry drivers led to challenges in supplying fuel, panic buying ensued, creating even more shortages. This can further push fuel prices up impacting oil companies, even if marginally.
Investors shrug off Shell’s warning
Bearing this in mind, it is little wonder that investors paid little heed to Shell’s recent warning. Earlier this week, the company said that Hurricane Ida would cost it £294m during the quarter, since oil rigs would need to shut down, affecting production. The company’s share price fell a bit in early trading when the news broke on Thursday, but the stock still ended the day up by 1%.
My concerns
However, I do have a concern about oil stocks. While rising fuel prices maybe good for them for now, they are actually feeding inflation. And if a balance is not maintained, soon enough the recovery will start losing momentum, which will ultimately result in a slump in oil stocks too. Also, gains in terms of revenue and earnings will not be as big in 2022 as this year, purely because of base effect. So investor sentiment can dip.
That said, on the whole I think both these FTSE 100 stock will continue to remain healthy in the foreseeable future. They are both buys for me.
