Is Oil Majors At Record Highs a Good Buy?

High crude prices have supported a surge in profits for oil majors, but with energy price pressures starting to ease and governments looking to raise taxes, what's next?

Record prices aren't there forever.

Oil majors posted record profits in the last quarter, aided by extraordinarily high oil prices due to the war in Ukraine and European nations stocking up on fossil fuels heading into the winter. But global recession fears have grown in the last couple of months - the UK officially declared itself in recession - and initial expectations that China would end its zero-covid policy have been dashed.

Oil companies have chosen to use the profits to pay back investors after the tough years of the pandemic instead of significant increases in research and exploration. The global consensus is to transition to carbon neutrality in the coming decades, meaning that long-term investment in oil will provide diminishing returns. Meanwhile, governments have been looking at the money made by oil companies with increasing interest and planning special taxes.

So, transition?

The very thing that is generating sizeable profits for the oil industry could also be what causes a downturn: Higher inflation has caused monetary policy tightness, eating into consumers' disposable income and tipping the world towards contraction. The IEA most recently cut its forecast for oil demand next year. Windfall profits imply that the situation is a one-off and likely not to continue. Even if the war in Ukraine, which has been the catalyst for most of the rise in crude prices, continues, the energy market will adapt, and prices will stabilise.

Beyond that, prospects aren't all that encouraging for the oil industry, which might be suffering from short-term-ism. The transition from fossil fuels makes investing in oil less attractive, so companies have resorted to paying out higher dividends to attract investors. However, they aren't investing significantly into transitioning to renewables to secure long-term profitability. This discourages investors from repeating the cycle. All the while, activists push for an energy transition, and oil firms also need a financial transition to be able to rebound once the expected economic storm next year passes.

Time for a turnaround?

Chevron hit a record high of $190 on Nov 14 as it broke above the base channel originating at $132. Maintaining prices above the upper trendline will keep the bias upward, with a spike to $200 as the next potential event. Typically, the height of the channel added to the breakout point gives traders a good idea of a target, which might lead the way toward $210. Losing the short-term base at $180, whenever possible, might see prices return within the common trend, with $174 and $166 providing some support. If bulls fail to hold $152, $138 becomes the last resort before a complete medium-term reversal to $132. From there, it will be hard to recover.

Key takeaways

Oil companies have been profiting from high oil prices due to the war in Ukraine, but this may not last as global recession fears grow and governments look to raise taxes. The IEA has cut its forecast for oil demand next year, and even if the war in Ukraine continues, energy prices will eventually stabilise. However, long-term investment in oil is less attractive due to the transition to carbon neutrality, so oil companies have resorted to paying out higher dividends to attract investors in light of the financial transition and to be able to rebound once the expected economic storm next year passes.