Hold on to your Oil & Gas Stocks10 Nov 2022 12:48
Hold on to your oil and gas stocks
Oil and gas stocks have done very well in the last few months. But theyve got a long way to run yet.
by: Dominic Frisby
10 NOV 2022
The fossil fuel story is only slowly starting to change.
Today we consider energy and oil and gas stocks once again.
While oil and gas prices have done a great deal over the last six months up a bit, down a bit, then sideways the associated companies have done very well: the producers, the service companies and so on.
Many years of bear market belt tightening are now paying off.
However, in my opinion, we are not yet at that point of excess and decadence that marks the end of a cycle crazy mergers and acquisitions, insane valuations and Bacchanalian behaviour from the executive classes. So I venture today, as last week, that there is still plenty of gas left in the tank of this bull market.
With that in mind, I wanted to share a few charts with you today that give an idea of what is possible.
Oil and gas stocks are on the rise
The first chart shows the ratio between energy stocks and the rest of the market.
Indeed, without energy stocks there would not be a rest of the market. This a simple point that many, especially those who make policy, don't seem to understand. The world we live in today and the economic benefits we enjoy, relative to our ancestors, have been made possible by fossil fuels.
So here is the energy sector relative to the S&P 500. The higher the chart goes, the bigger the relative market cap of oil and gas stocks.
You can see that, even with the rally we have seen in energy companies since 2020, on a relative basis, energy companies are, give or take, where they were at the turn of the century, when oil itself was around $10/barrel and that secular bull market was only just getting started.
CHART1
You can also see that we are in an uptrend. Energy stocks are increasing in value, while the broader S&P500 is flat or falling.
Its also worth noting that the relative market capitalisation was almost three times as large in mid 2008 when oil went to $147/barrel.
The inference is that the bull market has a lot further to run.
Oil and gas stocks are cheap compared to the broader market
Next, the ratio between oil West Texas Intermediate and the S&P 500.
You would expect this chart to trend lower over time because oil production and extraction techniques should improve over time, while broader economies and the companies that operate in them grow.
Nevertheless, we are below the levels we were in the early part of the century. You can see how high this ratio went in 2008 and how low in the corona panic of 2020, when oil futures, somehow, went into negative territory.
CHART2
Relative to the S&P 500, oil is roughly where it was three or five years ago Id say its at its three or five year average. And its a lot cheaper than it was throughout that entire 2003 to mid 2014 timeframe.
So even with the gains of th
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