Warren Buffett is investing in oil. Should I?

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Warren Buffett buys more stake in oil giant Chevron Corporation Towards the end of 2022.

Instinctively, I thought this was an unusual move. Especially given that oil prices have by this point normalized after last year’s highs hitting new highs.

But I know Buffett chooses for the long term, and he is seldom wrong. can i get it?

oil outlook

In 2022, there were wild swings in oil prices. But the final impact is that oil prices have ended the year that just started. Indeed, fueled by the surge in oil prices that summer, we noted the excellent performance of oil stocks. But from an annual point of view, prices were stable. In addition, the International Energy Agency (IEA) has already predicted an increase in renewable energy, but the outlook for oil continues to be ‘slower’. This is where I find Buffett’s move puzzling.

But heavy oil importer China has lifted its COVID lockdowns and reopened its borders. We understand that this indicates that a recovery in demand is underway.US bank goldman sachs We believe this development could spur a significant surge in oil prices this year. I suspect these themes shaped why Warren Buffett went long oil.

Best of FTSE 100 Oil & Gas Sector

My take on Buffett’s investment case for Chevron is its size in all aspects of the oil and gas market. This makes it an excellent hedge against inflation. The company has also recently moved into the renewable energy market, which is a positive long-term move. I think the standout feature is that the company’s price/earnings ratio is at his lowest level in seven years.equivalent super major FTSE100 teeth BPIt has the same market size as Chevron. Both companies had a strong 2022 for him, but still underperformed relative to the broader sector. Both are increasing their share in the renewable energy market.

We certainly feel that BP’s stock is in cheap territory. But the government’s plan to impose an energy profits tax on the industry is reluctant. This is a much heavier tax burden for the company and reduces profitability. These factors, along with the increasing penetration of renewable energy, will, in my view, lead to lower long-term growth rates for the sector. This is a huge barrier to my potential investment.

Why I Don’t Follow Warren Buffett

Oil stocks were attractive last year as hedges against inflation and recession. Both risks are still very much alive, so I understand why Warren Buffett and his team decided to up the stakes with their Chevron investment.

Like Chevron, BP is a supermajor that would profit if oil prices spiked this year like it did last year. But looking further ahead, I don’t think the picture for BP or the traditional oil and gas sector as a whole is so optimistic. I think the business model of the supermajors is still heavily biased towards natural resources.

As an investor, I know that independent thinking is important. As experienced as Warren Buffett is, at least not anytime soon, he won’t be making similar purchases in the oil and gas sector as he recently made.

Good luck though, Warren!

Post Warren Buffett Investing in Oil. Should I? It first appeared on The Motley Fool UK.

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Henry Adeforp has no positions in any of the mentioned stocks. The views expressed about the companies mentioned in this article are those of the author and may differ from official recommendations on subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.

Motley Fool UK 2023

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