FTSE 100 oil stocks have crashed around 43% from their January peak. It’s been a jittery and distressing period for those of us who invest in oil firms BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB). If your ISA has taken a bashing too, trust me, I know exactly how you feel.
The coronavirus crisis has destroyed the global demand for oil. As the entire economy has been affected, many people and businesses are unable to spend money on fuel bills, transport, and many other goods and services.
Moreover, with no one buying oil, even the recent OPEC+ supply cuts aren’t enough to prevent an oil glut. One oil price benchmark, West Texas Intermediate (WTI), recently dropped into the negative zone at around -$37 per barrel.
Oil stocks, with their close association with oil prices, have smashed through the floor.
Hope for FTSE 100 oil majors
Despite the doom, there is a glimmer of light on the horizon for FTSE 100 oil majors.
The negative US WTI benchmark figure is for the May contract, with physical oil deliveries at Cushing, Oklahoma, US. And this expired on 21 April. The tanks at Cushing were near to capacity amid the collapse in demand. This meant contract owners had to pay buyers to get rid of the oil for them. Hence the WTI price plunge. The June contract is currently trading in double figures, around $11.
The Brent oil market is a different beast. Its price is far less volatile as it’s shipped by sea to customers, avoiding landlocked choke points. In addition, its trading is settled in cash, so the market is unlikely to see negative pricing.
Furthermore, low oil prices are good for global growth. This will help the larger importers such as China, India, and Germany with recovery from the coronavirus pandemic. In turn, this should begin to increase oil demand once again.
Some oil and gas companies may be put out of business. These will most likely be the more expensive shale operators and those who only focus on exploration and production. A strength of the FTSE 100 oil majors is their diverse operations across the whole oil industry, from exploration to refining to trading. This could mean less future competition for these big and varied firms.
Oil companies offer bargain buys
Stock markets investors consider the future more than fickle oil speculators. The FTSE 100 is currently up 16% from its March bottom.
Source: London Stock Exchange
Both oil majors have share prices on the up, growing with the FTSE 100.
In addition, BP and Shell are cash-rich companies. This stands them in good stead to ride out these troubled times.
BP is currently trading on a price-to-earnings of 19.1 to Shell’s 8.6. The average P/E for pre-crash oil companies was around 17. BP’s P/E is higher than this but it reflects the positive market expectation of its future.
And with dividend yields of 10.6% for BP and 10.9% for Shell, what’s not to like?
I think both FTSE 100 oil majors look like good buys right now. The stock market appears to have bottomed and is on the way back up. I’m buying both companies now before prices rise even further.
