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Oil and gas stocks are booming: will they go higher or have they peaked?

UK oil and gas stocks have risen in 2022 in stark contrast to the wider FTSE 100. So, is the sector likely to continue its...
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FTSE 100-listed giants BP and Royal Dutch Shell have both seen their share prices rocket this year.

So, are UK oil and gas stocks likely to go even higher in future? Or has the sector already peaked? Let’s take a look.


What has happened to oil and gas stocks recently?

In 2020, BP plc and Royal Dutch Shell plc saw their share prices halve between January and March. The pandemic was understandably the cause of this fall due to investors anticipating plummeting demand.

However, since early 2020, UK oil and gas stocks have performed well. For example, last year Royal Dutch Shell’s share price rose by more than 10.4%. Meanwhile, BP’s share price increased by a near-identical 10.7%.

While these rises were nothing to be sniffed at, the returns were actually lower than the FTSE 100 average. In 2021, the UK’s largest share index rose 14.3%. This was officially the FTSE 100’s best performance since 2016.

So far in 2022, oil and gas stocks have rocketed. Royal Dutch Shell has seen its share price jump from 1,700p to 2,002p between the start of the year and mid-March. That’s a rise of 17.7%.

BP shares, meanwhile, have gone from 351p to 380p over the same period. That’s an increase of 8.26%. 

Compare these returns to the wider FTSE 100, and it becomes clear that oil and gas stocks have bucked the trend in 2022. So far this year, the FTSE 100 is down 0.4%.

What’s the deal with crude oil prices?

In April 2020, a month or so after the first wave of Covid-19, crude oil prices hit the headlines when the value of a barrel briefly fell below $0. However, the commodity didn’t take long to make a mini-recovery. By the end of 2020, it had risen to $40 (£30.14) a barrel.

Since then, crude oil has shot up in price due to a cocktail of increased demand and supply pressures. As of 22 March, a barrel of crude oil now costs $119 (£89.66). That’s almost double the price compared to a year ago.

It’s a similar story with gas. Wholesale prices were already rocketing towards the latter half of 2021 due to supply shortages. Since then, gas prices have been a one-way street. In fact, on 24 February this year, gas prices rose 28% in a single day following the news that Russia had invaded Ukraine.

Of course, while higher prices at the petrol pumps and soaring energy bills cause financial pain for consumers, the oil and gas sector can understandably benefit.

In its latest earnings report, it was revealed that Royal Dutch Shell saw its profits swell to £19.3 billion in 2021 compared with $4.85 billion in 2020.

Meanwhile, BP revealed that it had experienced a bumper Q4 in 2021. The oil giant saw its profits rise from $3.3 billion to $4.1 billion. This was its highest quarterly rise in eight years.


Will oil and gas stocks go higher or begin to fall?

Amid the ongoing war in Ukraine and the related sanctions imposed on Russia, it’s possible that oil and gas stocks will continue rising for the rest of 2022. 

While you may think the recent announcement by Saudi Aramco that it will increase its capacity of oil to 13 million barrels a day will help to curb rising prices, bear in mind that this increased production won’t happen until 2027. As a result, this alone is unlikely to have much of an impact on current oil prices.

Of course, if the war in Ukraine comes to an end, and/or gas supply issues in Europe improve, then we could see the price of wholesale oil and gas decrease this year. If either of these events happens, then oil and gas stocks may fall as a result.

Without a crystal ball, it’s impossible to know for sure how oil and gas stocks will perform for the rest of the year. That said, given these stocks are bucking the trend somewhat, buying oil and gas stocks may be an effective way to diversify your portfolio. This is especially true if you don’t currently have any exposure to the sector.

If you are looking to add to your portfolio, take a look at The Motley Fool’s top-rated share dealing accounts. As with any type of investing, remember that the value of your investment can fall as well as rise.

Are you reluctant to invest in oil and gas? Fossil fuels have their fair share of critics. So, if you’d rather invest in more ethical sectors, take a look at our article that explains how you can tell whether an investment is ethical.

The post Oil and gas stocks are booming: will they go higher or have they peaked? appeared first on The Motley Fool UK.

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