Could oil stocks help to boost my wealth?

Oil stocks like BP and Shell trade on rock-bottom valuations and boast big dividend yields. But is buying energy stocks like these too risky?

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Profits across the oil stocks world have ballooned over the past year. Energy stocks like BP and Shell have seen their bottom lines (and their share prices) soar during the post-pandemic recovery.

In fact, a report from Janus Henderson says crude oil stocks have been responsible for a huge chunk of corporate profits over the past year.

Oil company profits have soared

Global profits soared 65% year-on-year to a record £3.93trn in 2021/2022 (1 April 2021-31 March 2022), according to the Henderson Far East Income investment trust.

The trust says surging crude prices meant oil companies were responsible for a quarter of this increase, too. These energy companies recovered from losses of £83bn during the height of Covid-19 to record profits of £282bn in the last year.

The trust says oil firms “will see even greater profits in 2022/23” too.

More earnings growth expected

Janus Henderson’s optimistic take isn’t surprising given the strength of oil prices in recent months. Take Brent crude, for example, which soared to 14-year highs around $140 per barrel back in March.

This naturally fuels predictions that profits at oil stocks will continue rising strongly in the near term. City forecasts suggest Shell’s earnings will just about double year-on-year in 2022. Meanwhile, BP’s profits are expected to leap 226% from 2021 levels!

Oil price uncertainty

I’m not sure that oil prices will retain their earlier strength in the second half of 2022 and into next year. And that could put current forecasts under pressure. This is because concerns over a global recession are growing and could cause oil prices to sharply reverse.

Indeed, the Energy Information Administration this week cut its crude price forecasts on expectations of reduced economic activity. The body now thinks Brent crude will average $104.05 and $93.75 in 2022 and 2023 respectively.

This comes as Brent prices has fallen below $100 per barrel in recent hours.

The main threat to UK oil stocks

My expectation is that oil prices could start falling sharply despite fears over Russian output. But even if I had an opposite view I still wouldn’t buy oil stocks. Why? The rampant growth of renewable energy which threatens the long-term future of the oil market.

Demand for clean energy is growing at such a rate that the International Energy Agency predicted in October that peak oil demand will come in 2025. That’s years earlier than it had previously forecast.

And while BP and Shell have been investing heavily in renewable energy, the bulk of their profits come from fossil fuels.

So, sure, these oil stocks look cheap on paper. Both are trading on ultra-low PE ratios of below 5 times. But I think their low valuations reflects the huge risks they pose to investors as green energy gradually takes over. I’d much rather buy other UK shares to try and make big returns on my money.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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