What's going on with oil and gas?
An update from Dr John
At the start of September we looked at investing in oil and gas. Since then, there’s been plenty of news dragging oil down - a strong dollar, recession and consequent “demand destruction”. And there’s been plenty of news to drag it up - OPEC+ cutting oil production, analyst talk of a disjunction between very tight physical markets and paper markets speculating on oil price falls and constant “energy-crisis” news. Natural Gas is even more volatile.
For any long-term investor all this must be treated as noise.
The long-term thesis is that, as a starting point, oil company shares are on low valuations, both absolutely and relative to the wider market.
Add in the prospect of a strong oil price based on the simple assumptions that, firstly, renewables will take a long time to take oil and gas’s share of primary energy production and, secondly, that oil companies have underinvested in oil in the last 10 years because of ESG concerns and the fall-out from the previous bull market of over-investment.
That’s it: an investment case that will pan out over years, not weeks or months.
The IEA in their World Energy Outlook 2020 stated “The era of growth in global oil demand comes to an end within ten years” (page 19) and that “global natural gas demand growth might stop around 2040” (page 20).
Note that 2030 for oil and 2040 for gas are not when we won’t be using oil and gas anymore, but when the demand for them stops increasing.
Where is all this new oil and gas going to come from?
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