It’s time to refuel with oil stocks – but should you buy BP or Shell?

Fortunes have already been made from the oil price boom sparked by the war in Iran, and there are likely to be more gains to come.

Yet some investors have been staying on the sidelines, deeply concerned by the conflict and reluctant to commit at a moment of severe geopolitical uncertainty.

But this week that’s been changing. More private investors have been buying British and American major oil groups like Shell, Chevron and Exxon Mobil, according to brokers Etoro.

Suddenly there’s a realisation that, whatever the outcome of the hostilities, a new oil world order has been ushered in. Yesterday’s announcement that the Strait of Hormuz is opening to shipping during the ceasefire between Israel and Lebanon eased tensions and caused the price of Brent Crude to drop to below $90 a barrel. BP shares fell 7.36 per cent and Shell was down 5.57 per cent.

But the conviction remains of a longer lasting change.

New York energy research firm Goehring & Rozencwajg commented: ‘For years, the prevailing view has been that the oil industry represents a barbarous relic of the industrial past, but recent events have undoubtedly challenged this perception – and compelling opportunities are emerging.’

In particular, the spotlight has been turning on BP, after news of the ‘exceptional’ performance of its trading desk.

More will be revealed at the group’s first-quarter results later this month. We should also learn more about BP’s reinvention under new boss Meg O’Neill, who is refocusing it on oil and gas, following an ill-thought-out excursion into green energy.

But BP is attracting attention for another reason. At next Thursday’s annual general meeting, its new-ish chairman Albert Manifold faces an insurrection over aspects of the shift away from a climate change emphasis.

A group of institutional shareholders, who include Legal & General Investment Management, want to unseat Manifold, although he says BP is sticking to its net-zero ambitions.

They are also unhappy about his decision to exclude a shareholder resolution asking how BP would shield shareholder value if sales of oil and gas tumbled.

Manifold should survive. Why would shareholders want to oust a chairman in the early stage of a turnaround aimed at ‘building a simpler, stronger and more valuable BP’?

But the rebellion indicates a broader willingness to hold senior bosses to account, presenting another reason to refuel your portfolio with oil stocks. Here’s how to get started:

WHERE NEXT FOR PRICES?

Just last December it was predicted that a global glut of oil would push down prices in 2026. But US bank Morgan Stanley is now forecasting an average price of $110 for the second quarter of this year, falling to $100 for the third quarter, and to $80 in 2027.

Scarcity could stifle demand. The International Energy Agency is even warning that worldwide oil consumption could shrink by the greatest degree since the pandemic. But prices are still likely to remain elevated. Hakan Kaya of fund management group Neuberger says: ‘A resolution of the conflict does not flip a switch.

‘Even optimistic timelines suggest several months before flows begin to resemble anything close to their former levels.

‘Once that happens, there is a restocking cycle ahead. Inventories have been drawn down dramatically. Refilling those buffers could add meaningfully to demand over the next couple of years.’

THE POLITICAL ANGLE

A move into oil should offset the blows to your finances from the war. The UK economy will be harder hit than any other G7 nation, according to the International Monetary Fund (IMF).

And the Resolution Foundation thinktank warns the average household will be about £480 worse off this year.

Against this backdrop, oil stocks could prove ‘a valuable component of a diversified portfolio’, as Victoria Scholar of Interactive Investor puts it.

However, the Government’s policy will obstruct oil companies’ ambitions. For example, Chancellor Rachel Reeves will no longer be shelving the windfall tax on North Sea oil and gas firms.

This may be linked to the estimate from US investment bank Goldman Sachs that BP and Shell could earn an extra £5billion in profits this year, as a result of the war.

Meanwhile, Energy Secretary Ed Miliband declines to permit new drilling in this area, sticking to net zero despite the need to bolster Britain’s energy security.

THE SHARES

As part of its renewal, BP will be simplifying its operations into upstream (drilling and exploration) and downstream (refining, marketing and the rest).

The US activist investor Elliott, which has a 5 per cent stake in the company, has been seeking a return to this traditional set-up.

Elliott should be gratified by the 35 per cent bounce in BP’s shares over the past six months to 584p. Most analysts rate them a ‘hold’.

But if you would like to back the new management’s transformation endeavour, Barclays analyst Lydia Rainforth is targeting a price of 650p. BP may not be among the FTSE 100’s highest-yielding stock, but its 4.46 per cent return is still attractive.

Shell may already have become leaner and more efficient under chief executive Wael Sawan. But its oil and gas reserves are low compared to some of its rivals, so expect the resurgence of rumours of a bid for BP, which is considered to have a better resource base.

Most analysts currently consider Shell a ‘hold’: shares have climbed by 24 per cent to 3384p over the past six months. But investors seeking solid ‘forever’ names to provide a portfolio bulwark could consider Shell if the price dips.

The popularity of Chevron among UK investors arises from its scope to make the most of its operations in Venezuela following America’s intervention there.

The shares have risen by 23 per cent over the past six months to $187. But this week, analysts have been resetting their target prices to as high as $236.

Analysts are also revising their target prices for another US titan – Conoco. The shares, which currently stand at $121, are tipped to go to $160 by one analyst.

The Exxon Mobil price has dropped this month, but it is still 37 per cent above its level of six months ago, at $152. Again, analysts are becoming more optimistic about the prospects, with one firm setting a target price of $195.

THE FUNDS

These upbeat assessments could be a spur to look at US corporations that provide energy sector infrastructure, such as Kinder Morgan which runs 78,000 miles of pipelines and 136 terminals.

GE Vernova delivers ‘equipment, services and digital solutions across the entire spectrum of oil and gas production and power generation’. Its shares are up 62 per cent to $975 over the past six months, but are still seen as a buy by a majority of analysts.

You may have some exposure to oil through funds and trusts. Shell is the second-largest holding at City of London investment trust (a bulwark of my portfolio). BP is the number one stake at JO Hambro UK Equity Income.

But, given the establishment of a new oil world order, it could pay off to put some of your money into a fund like Schroder International Selection Fund Global Energy, which is the choice of professionals such as Ben Yearsley of Fairview Investing. This fund’s managers also run Schroder Energy Transition, which invests in renewable energies.

Fossil fuels will be the future for longer than we had supposed, but hedging your bets always makes sense.