Image source: Getty Images
September was a bad month for oil stocks. Shell (LSE: SHEL) fell around 10%. Meanwhile, PA (LSE:BP.) Shares fell about 9%.
Is now the time for investors to consider buying these oil stocks? Let's discuss.
Why have these stocks fallen?
The reason these stocks fell last month is because oil prices were weak.
On September 10, oil plummeted to its lowest price all year due to concerns about global economic conditions (a weak economy can mean lower demand for oil).
Oil prices fell again at the end of the month after Saudi Arabia said it is planning to increase its oil production and is abandoning its target of $100 per barrel of oil (i.e. it expects lower prices).
As I write this, Brent crude oil is trading at around $71 per barrel. That's about 22% below its 2024 high of $91.
This type of oil price weakness is a key risk when it comes to this Footsie stock. Ultimately, your earnings, cash flows and share prices can be greatly affected by oil prices, which are notoriously volatile and unpredictable. The way I see it, oil stocks are quite speculative in nature because no one really knows what profits will be like in the future.
<h2 class="wp-block-heading" id="h-are-the-stocks-cheap-today”>Are stocks cheap today?
Is there any value on offer today? Probably. At first glance, the stock looks cheap.
Currently, BP has a forward price-to-earnings (P/E) ratio of 7.6, while Shell trades at 7.8 times this year's expected earnings.
It is worth noting, however, that in this sector P/E ratios are not very reliable indicators of value. Since earnings can fluctuate widely, earnings forecasts can vary from year to year and sometimes also be significantly off.
Healthy dividend yields on offer
However, we can look at the dividend yields. And right now, they're relatively attractive. Currently, BP has a residual yield of 5.4%, while Shell shares offer 4%.
That BP performance looks pretty tasty. If my investment goal was income, I might be interested in the stock's dividend. Of course, dividends are never guaranteed and BP has cut its payouts in the past.
Additionally, dividends on these stocks are expressed in US dollars. If the pound continues to rise, it will translate into less income for UK investors.
<h2 class="wp-block-heading" id="h-better-stocks-to-buy-for-the-long-term”>Best stocks to buy for the long term?
However, at the end of the day, the question of whether to buy or not really comes down to one's outlook on oil.
If oil prices rebound, these stocks could do well in the medium term. If oil prices fall or remain static, these stocks could underperform.
Personally, I have no idea where oil will go next, since I'm not an energy expert (and even experts have a hard time accurately forecasting oil prices). Goldman Sachs has an average 2025 Brent crude oil price forecast of $76 per barrel, about 7% higher than current levels. CitiOn the other hand, it expects Brent crude oil prices to fall to $55 per barrel by the end of 2025 (down 23%). That's a big difference!
Given the uncertainty here, I believe there are better (more predictable) stocks to buy for my investment portfolio.
