Investing in energy stocks: wild ride tipped to continue

A surprise cut to global oil production this week fired up interest in energy company shares, but do they have a bright future?

Fears about the looming death of traditional energy stocks appear greatly exaggerated, although oil, gas and coal companies face a bumpy ride in the face of the growing renewables wave.

This week’s decision by the OPEC+ group of 23 oil-producing nations to cut production by one million barrels sent crude oil prices and energy company share prices higher, continuing their long grind upwards from the lows of 2020.

Crude oil prices have surged 25 per cent in just two weeks – from $US64.36 to more than $US81 – but analysts say the short-term outlook is “anyone’s guess” because a global economic downturn could have a huge impact.

Current crude prices are a long way above the negative prices of three years ago, but also a long way below their peaks near $US130 last year.

The longer-term outlook for energy stocks is clouded by the global push towards renewable energy, the looming bans on new fossil fuel engines in many countries and the rapid growth of electric vehicles, but the transition may take decades.

IG market analyst Tony Sycamore said while the world was moving towards cleaner energy, there was still strong demand for oil and coal.

“Talk of their demise is probably premature,” he said.

“Energy is still a hugely important part of the global economy. Factories in Europe still need gas to power their machines, cars need petrol and coal is still a massive part of heating homes.”

People who sold all their energy stocks 4-5 years ago acted too early, it appears.

“Those people have probably done that in good faith, but have done damage to their back pocket,” Mr Sycamore said.

He said Woodside Energy remained Australia’s standout investment in the sector, helped by its broad suite of assets across oil and gas, while there also could be value in coal companies Whitehaven and New Hope that had suffered sharp falls since December.

“You still have to have that exposure to energy.”

Woodside shares could climb back towards its record $39.58 reached last year, up from current levels near $34.50, Mr Sycamore said.

Whitehaven Coal was trading near $11 in December and two weeks ago was $6.37, he said. “If you think coal will stay part of the energy mix over the next three or four years, the price is 40 per cent less than at the end of last year.”

Mr Sycamore said the world consumed about 90 million barrels per day of crude oil, and the OPEC+ production cut of one million barrels represented about 1 per cent.

Bell Direct market analyst Grady Wulff said the OPEC+ cut was aimed at stabilising a weak market worried about recessions and banking crises, but fuelled a 10 per cent weekly rally for oil stocks.

“But as investors digested the impact of higher oil prices on cost of living pressures, we saw investors reconsider their positions and shift out of oil stocks,” she said.

“On the long-term outlook, I feel oil has too big of a role to play in society to be wiped out completely. But I think we will see the mining giants diversify further into battery metals and reduce their reliance on revenues from oil, as we are currently seeing with Mineral Resources and their lithium assets, and BHP lobbing a takeover offer at Oz Minerals.”

CMC Markets analyst Tina Teng said crude oil had consolidated above $US80 per barrel this week “after OPEC+’s unexpected output cuts” but demand concerns lingered because of economic worries.

Saxo Markets Australia market analyst Jessica Amir said the short-term outlook for energy was “highly volatile”.

Grady Wulff, market analyst at Bell Direct, says oil has a big role still to play.

“The oil price is a proxy for global economic growth, and we think a recession is now a 50 per cent chance later this year – that would be a catalyst for the oil price to remain restricted,” she said.

Ms Amir said rising demand from China, the world’s largest oil consumer, could help push prices further above $US80 in the coming months.

Longer term, investing in traditional forms of energy could deliver good returns “for a while”, she said.

“The emphasis is on ‘a while’. How long’s a piece of string?”

“We will continue to be dependent on fossil fuels and coal for some time.”

Ms Amir said Woodside remained a strong investment. “It has a 30-year contract off the Gulf of Mexico to produce oil there,” she said.

“Santos is another one to keep an eye on.” The company was a large LNG producer expected to be a key pillar in exporting gas to Britain, Ms Amir said.