I keep looking for the bear case on oil and oil stocks, and I can’t see it.
The most credible one is oil drops as part of a global recession.
But (1) the economy is still strong (2) any recession is going to be caused by central bank tightening that can be reversed (3) it is far from clear any downturn would reduce oil demand more than supply.
Excluding the effect of Russian investment one-time writeoffs, BP had a PE of about 4, and is planning on buying back about 9.5% of its shares over the next year, and it will still have huge cash flow to pay dividends and reduce debt.
There is some justification for this low valuation: futures markets suggest a long term oil price of about $65. While I think that is certainly possible, my base case is that it will be more than double this amount.
And the $65 oil in 2030 the futures market suggests would require oil companies to invest in new production when they are reluctant to do so at $120 oil, and also end user oil expenditures as a percentage of GDP be a very low historical levels.
In 2016 Apple had a PE of 10.6, and 6 if you backed out its large net cash position. That didn’t make much sense, Warren Buffet started buying in, and the stock went up 7-fold.
