So far this year, oil stocks have been the standout performers in both the S&P 500 and FTSE 100. By contrast, the darlings of the stock market over the past 10 years, the FAANGs — Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet), are all down. But with the long-term viability of the oil industry in doubt, are the days of Big Oil numbered?
2022 – the year of Big Oil
Recently published research by CMC Markets, highlights the huge chasm that has opened up between oil stocks and the rest of the stock market. This is summed up perfectly in the following table:
| Company and ticker symbol | Performance year to date (%) |
| Occidental Petroleum (OXY) | 126% |
| ExxonMobil (XOM) | 58% |
| Shell (Shel) | 40% |
| BP (BP) | 37% |
| Glencore (GLEN) | 26% |
| Netflix (NFLX) | -62% |
| Meta Platforms (META) | -52% |
| Tesla (TSLA) | -45% |
| Amazon (AMZN) | -31% |
Occidental Petroleum has been the standout performer in the S&P 500 in 2022. Soaring oil prices have turned the company into a cash generating machine. Its extraordinary gains could have been helped by the Warren Buffett effect. Berkshire Hathaway owns 7m of its shares.
In the UK, both Shell and BP shareholders have profited handsomely from rising commodity prices. This includes Glencore, whose main source of revenue is coal.
The performance of such stocks is in complete contrast to the technology sector. In 2021, it was the unprofitable tech companies that first began to falter. Now, in 2022, the contagion is spreading to the mega-cap growth stocks. Investors are waking up to the reality that fundamentals do matter after all.
The bull case for oil
History demonstrates that as oil hovers around the $90-$100 range, investment should be flowing into the sector. After all, that’s what happened during the shale boom of 2014, when oil hit $100. A similar picture emerged in the run up to the global financial crisis, when it hit $150.
Today, as a percentage of GDP, capex investment in the commodities sector is at a near 20-year low. The predominant reason for this underinvestment, I believe, is the rise of the environment, sustainability and governance (ESG) agenda.
Yet significant tailwinds for commodities means that oil is likely to be in high demand during the next decade. For example, the pandemic and increasing geopolitical tensions have put significant strain on supply chains. Many companies are actively moving their manufacturing operations away from China. In such a scenario, commercial construction in the US and UK markets could boom.
The bear case
The case against oil fundamentally rests on it being a dying industry. As the world reduces its reliance on hydrocarbons, the industry could be left with stranded assets. But the fundamental unknown is the time frame over which this will happen.
The pandemic brought to the fore problems that, in my opinion, had been there for some time. For the last 15 years, human and capital investment has flowed into the tech sector. However, the rise of inflation changes everything.
During periods of high inflation, history shows that commodities do well. Rising interest rates will eventually reduce demand. But until the supply side is dealt with, I see oil stocks continuing to outperform the general market. That’s why, on any dips, I continue to add to my commodities stocks.
