Oil and Gas Industry: A Current Analysis

Last Updated: 7. März 2024By

The DAX and other major international stock indices have recently marched from all-time high to all-time high. However, the record run is not yet being supported by the broader mass of stock companies. Specifically, technology stocks are often performing very well, while stocks from other industries are still far below their old record levels.

This is also the case for many stocks in the oil and gas industry, which are still trading well below their old record levels. While gas prices are significantly below the „panic prices“ reached after the imposition of sanctions against Russia, oil prices have already risen from $75 to around $83 per barrel in recent weeks, an increase of about 40% compared to 10 years ago.

Despite price fluctuations, most oil and gas companies are still earning handsomely. The high corporate profits, combined with low stock prices, make the fundamental valuations very attractive. This means that stocks often have a low price-earnings ratio (P/E ratio) and a high dividend yield.

So why are stocks still struggling? There are several reasons for this: fear of a demand slump in an economic crisis, fear that oil and gas will be replaced by renewable energies in the near future, and some investors no longer want or are not allowed to invest in companies that make their money from fossil fuels. The first point is a „classic“ in the oil industry. The industry is constantly in an upswing or downturn. It is tactically wise to not buy when sentiment is high (high stock prices), but rather when sentiment is low (cheap bargain purchases). This requires strong nerves, as it is never clear beforehand when the bottom has been reached and the next rally will begin.

It is possible that the stock may initially fall by 10 or 20% after your entry. However, during these periods you can often collect generous dividends as „compensation“ and wait calmly for the next upswing.

Uncertainty about the long-term demand for oil The second and third points are relatively new. There are no historical patterns to use as a reference point. I have to say it openly: it is completely unclear what long-term oil demand will look like.

For example, last year the International Energy Agency (IEA) published the following base scenario: currently, almost 100 million barrels of oil are consumed per day. This value could increase slightly or stagnate in the coming years, and then decrease to around 92.5 million barrels per day by 2030.

According to the IEA, this decline will continue until 2050, bringing the long-term demand down to 54.8 million barrels per day, which would roughly halve over the next 25 years. However, if major consumers implement the energy transition much more slowly, the IEA also believes that daily oil consumption could only slightly decrease to 97.4 million barrels by 2050.

Oil producers have even more different numbers. OPEC, the organization of oil exporting countries, expects daily oil demand to increase to 116 million barrels by 2045.

My conclusion: in the coming years, oil consumption could rise to over 100 million barrels per day, and in the second half of the decade, it could fall towards 90 million barrels. This would be a relatively stable demand overall, making it an ideal scenario for oil companies. Therefore, in my opinion, there is no reason to avoid oil and gas stocks at the moment – quite the opposite.