Is it too late to buy oil & gas stocks
Since the start of 2022...
Brent crude oil has gone up 55%
$Chevron(CVX.US$ Chevron has gone up 43%
$Exxon Mobil(XOM.US$ ExxonMobil has gone up 38%
$ConocoPhillips(COP.US$ ConocoPhillips has gone up 36%
Consumers are feeling the impact as Shell announced two days ago to raise the 95-octane grade to beyond $3 per litre ($3.06).
Some investors may be wondering if they should hedge their portfolios as the inflation is worsening. Some may even wish to profiteer from this situation. But is it too late to buy considering that the prices have gone up?
First, let us figure out what brought us here. The story started in 2008, during the Great Financial Crisis. To handle the Crisis, the Fed began flooding the market with liquidity through Quantitative Easing. The loose monetary policy continued for another 14 years.
This pool of liquidity became the tinder for inflation to ignite. Inflation threat didn’t arise until Covid hit the supply chain. The supply couldn’t catch up with the demand recovery - supply takes time to ramp up and now we have lots of money chasing limited goods = price spikes = inflation.
Oil price started to rise after it went negative in 2020. Price has gone up 81% since a year ago. Hence, it isn’t just the war between Russia and Ukraine that has fuelled the oil price. The inflation undercurrent was already present.
Yes, the war did cause the oil price to spike even more because Russia is a major exporter of oil and sanctions means the global supply gets cut.
OPEC+ countries refused to increase production and are enjoying the high oil prices. Their stock prices are rising in tandem - ETFs of Saudi Arabia $iShares MSCI Saudi Arabia Capped ETF(KSA.US$ , UAE $iShares MSCI UAE ETF(UAE.US$ and Qatar $Ishares Trust Msci Qatar Etf(QAT.US$ have gone up by 40%, 41% and 35% in the past 1 year respectively.
You might hold the view that this inflation problem is not going away anytime soon and hence it might make sense to buy some oil-related stocks as a hedge. Even Warren Buffett recently purchased a significant chunk of $Occidental Petroleum(OXY.US$ Occidental Petroleum despite the share price gaining 91% from a year ago. Apparently Warren Buffett thinks it is still cheap.
The 10y average PE is 6x while the current PE is at 26x. Even the forward PE is 12x. It doesn’t look cheap. But from the cash flow perspective it is fantastic - at 14.8% free cash flow yield. Buffett has always focused on owner’s earnings and it can be approximated by free cash flow. So that was what he was probably looking at.
I am no Warren Buffett and he knows something that I don’t. I can only be more prudent. Oil and gas stocks are cyclical in nature and that means that there are booms and busts. It doesn’t make sense to make them long term investments, especially you buy at the boom and had to hold through the bust.
Such stocks are meant to be bought and sold, and timing becomes important. Momentum strategies are suitable for such stocks now and just follow the trends until they end.
Buying is easy. I will emphasise exits because I observed many investors do not know how to sell - whether to take profit or cut loss. You don’t want to get stuck with these stocks once the commodity boom is over. The bust can last for many years.
Brent crude oil has gone up 55%
$Chevron(CVX.US$ Chevron has gone up 43%
$Exxon Mobil(XOM.US$ ExxonMobil has gone up 38%
$ConocoPhillips(COP.US$ ConocoPhillips has gone up 36%
Consumers are feeling the impact as Shell announced two days ago to raise the 95-octane grade to beyond $3 per litre ($3.06).
Some investors may be wondering if they should hedge their portfolios as the inflation is worsening. Some may even wish to profiteer from this situation. But is it too late to buy considering that the prices have gone up?
First, let us figure out what brought us here. The story started in 2008, during the Great Financial Crisis. To handle the Crisis, the Fed began flooding the market with liquidity through Quantitative Easing. The loose monetary policy continued for another 14 years.
This pool of liquidity became the tinder for inflation to ignite. Inflation threat didn’t arise until Covid hit the supply chain. The supply couldn’t catch up with the demand recovery - supply takes time to ramp up and now we have lots of money chasing limited goods = price spikes = inflation.
Oil price started to rise after it went negative in 2020. Price has gone up 81% since a year ago. Hence, it isn’t just the war between Russia and Ukraine that has fuelled the oil price. The inflation undercurrent was already present.
Yes, the war did cause the oil price to spike even more because Russia is a major exporter of oil and sanctions means the global supply gets cut.
OPEC+ countries refused to increase production and are enjoying the high oil prices. Their stock prices are rising in tandem - ETFs of Saudi Arabia $iShares MSCI Saudi Arabia Capped ETF(KSA.US$ , UAE $iShares MSCI UAE ETF(UAE.US$ and Qatar $Ishares Trust Msci Qatar Etf(QAT.US$ have gone up by 40%, 41% and 35% in the past 1 year respectively.
You might hold the view that this inflation problem is not going away anytime soon and hence it might make sense to buy some oil-related stocks as a hedge. Even Warren Buffett recently purchased a significant chunk of $Occidental Petroleum(OXY.US$ Occidental Petroleum despite the share price gaining 91% from a year ago. Apparently Warren Buffett thinks it is still cheap.
The 10y average PE is 6x while the current PE is at 26x. Even the forward PE is 12x. It doesn’t look cheap. But from the cash flow perspective it is fantastic - at 14.8% free cash flow yield. Buffett has always focused on owner’s earnings and it can be approximated by free cash flow. So that was what he was probably looking at.
I am no Warren Buffett and he knows something that I don’t. I can only be more prudent. Oil and gas stocks are cyclical in nature and that means that there are booms and busts. It doesn’t make sense to make them long term investments, especially you buy at the boom and had to hold through the bust.
Such stocks are meant to be bought and sold, and timing becomes important. Momentum strategies are suitable for such stocks now and just follow the trends until they end.
Buying is easy. I will emphasise exits because I observed many investors do not know how to sell - whether to take profit or cut loss. You don’t want to get stuck with these stocks once the commodity boom is over. The bust can last for many years.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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102175775 : so is this the beginning of boom or tailend? perhaps Buffett knows a bit more than others
TRIUMPHANT RETURNS : there Eni Spa
UNC Johnnie : I bought imperium
huang002339 UNC Johnnie: U lost
easygoing Lyon : what's next? police equipment?