Can you afford to wait another year for oil prices to rise? Can you afford not to buy oil stocks before they do?
Oil stocks tumbled on Tuesday, with both ExxonMobil (XOM -2.18%) and ConocoPhillips (COP -2.44%) shares sliding 2.8%, and Shell (SHEL -2.98%) falling 3.2% through 10:10 a.m. ET.
After strengthening to a recent high north of $77, West Texas Intermediate (WTI) crude oil prices turned tail and began falling last week. At roughly $70.60 per barrel, crude oil today costs 9% less than it did just a week ago. Worse news for investors, about half of that decline arrived today, with WTI prices dropping 4.5%.
The price of Brent crude, the international standard, is off about 4.1% today, and sits at just about $74 a barrel.
What’s ailing oil stocks?
Blame the International Energy Agency (IEA) for today’s slide. In a report released this morning, the IEA warned of “ample supply and slowing demand growth” through the end of 2024, reports OilPrice.com.
As recently as last month, oil demand was supposed to end 2024 903,000 barrels per day (bpd) higher than 2023. But with 2024 three-quarters over, the IEA’s new estimate predicts demand will grow by only 862,000 bpd this year, a decline of 4.5%.
Now, the good news is that the IEA sees demand picking up a bit in 2025, rising by about 998,000 bpd. The bad news is that the biggest “demander” of oil on the planet — China — is seeing “particularly weak” demand, with consumption dropping by 500,000 bpd year over year in August, its fourth consecutive month of declines, according to the IEA.
The other bad news is that as demand stagnates, supply is growing. The IEA estimates that between production increases from the United States, Brazil, Guyana, and Canada, non-OPEC oil production will end up rising by 1.5 million bpd this year, and then another 1.5 million bpd next year. (It’s also not helping that OPEC and its allied nations, OPEC+, just increased their oil production as well.)
Is it time to buy oil stocks?
You don’t need to be a math whiz to figure out that if demand grows at less than 1 million barrels per year for two straight years, while supply grows by 1.5 million barrels (or more) each year, then the market will end up with more oil supply than buyers demand. This lays the conditions for a price war among suppliers as they bid low to sell their oil and retain market share, causing oil prices to fall.
And this, obviously, is bad news for oil stocks.
But here’s the good news: Oil is a cyclical industry, where strong prices cause increased production, resulting in lower prices, which in turn spurs increased demand for cheap oil, resulting in prices rising again. That’s just how cycles work, and this means that oil stocks that are falling today are almost certain to rise again in the future.
So which of these oil stocks might you want to buy to bet on that future?
Priced at 14.8 times trailing earnings, ExxonMobil stock is the most expensive of the three. ConocoPhillips stock costs only 12.2 times earnings, while Shell is the cheapest of the three at just a 12.1 price-to-earnings ratio.
Growth-wise, analysts have all three stocks pegged for single-digit growth rates over the next five years: 6% for Exxon, 7% for Conoco, and 5% for Shell.
As for dividends, Shell is the most generous with a 4% dividend yield. Conoco pays 2.8%, and Exxon is in the middle with a 3.1% yield.
By my read, therefore, Shell edges out its rivals in two out of three categories. It’s got the cheapest valuation and the biggest dividend, lagging only on growth. If push comes to shove, I’d say Shell is probably — marginally — the best bargain of the bunch. But low-teens P/E ratios combined with modest growth and generous dividend yields mean you will probably do just fine investing in any of these three oil stocks, so long as you stick around for the long term.
