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Why I think BP and Royal Dutch Shell are top income stocks even as the oil price falls

There’s been a lot of noise about the impact of the US assassination of Iranian military commander Qassem Soleimani on oil stocks, so as the week draws to a close, where do we stand? Pretty much where we were before.

Crude facts

While Brent crude spiked to nearly $71 a barrel in the immediate aftermath of Iran’s retaliatory missile strike, it didn’t last. At time of writing, the price has fallen all the way back down to $65.06

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It is a similar picture with oil stocks. FTSE 100 giant Royal Dutch Shell (LSE: RDSB) is up just 0.43% compared to a week ago, almost as if nothing happened. BP (LSE: BP) has risen 2.33%, but these are the kind of movements we might see in a normal week, instead of one where some of the wilder internet fringes have been talking up World War 3.

Investors need to ignore that kind of talk and avoid making hurried, panicky decisions based on short-term noise.

$100 oil. Really?

After the deadly US drone strike, analysts were popping up to say that if things intensified, the oil price could top $100 or even $150. Never say never, but it doesn’t look that way at the moment. Even US President Donald Trump has said he is “ready to embrace peace”. Of course, this could change in a moment and markets will panic again, but if you are considering BP and Shell, do not assume the oil price will reach the skies because of Middle East strife. Instead, you need to examine the long-term outlook for energy markets, and there is plenty to suggest oil could idle for some time.

As global growth slows, Goldman Sachs reckons oil’s fundamental fair value is just $63 per barrel, which is where it seems to be heading at the moment.

While demand is relatively weak, global oil and gas discoveries hit a four-year high of 12.2bn barrels of oil equivalent (boe) in 2019, according to Rystad Energy, so supply isn’t a problem either. The US acts as a swing producer, as shale drillers ramp up production whenever prices climb. Even pirates are giving up on oil, targeting fewer tankers than in the days when the price hit $100 a barrel.

Then there is the growing political pressure and economics driving renewables, as wind and solar becomes increasingly cost competitive, and electric battery storage improves.

Still income heroes

BP and Shell are working hard to adapt, and outgoing BP CEO Bob Dudley insisted fossil fuels will remain a vital part of the currency mix, but de-carbonisation is a massive challenge to oil company profitability.

A resolution of the US-China trade war and pickup in global economic activity would be more of a boost than further problems in Iran. I would still pop BP and Shell into a balanced portfolio, given that both yield around 6.3% right now, which is not to be sniffed at. Today’s valuations look less than demanding at 13.69 and 10.52 times earnings respectively.

Then I’d hold them for the long term, while tuning out all that noise.

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Harvey Jones 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.