- Brent crude oil is sliding back to $93 a barrel
- Markets continue to price in a diplomatic solution to conflict in the Middle East and a return to lower oil prices
- Oil stocks remain relatively unloved, as measured by their weightings within major indices
- Analysts believe oil majors’ earnings will fall in 2027 and 2028
- The danger therefore is tensions between Washington and Tehran linger, or even escalate again
“Ever since the ceasefire between the US and Iran came into force on 8 April, financial markets have seen that as the end to the risk of an escalation in the conflict and the start of a de-escalation and path to peace,” says AJ Bell investment director Russ Mould.
“The theory is that peace will then bring oil prices down back to the $70-a-barrel mark, where they stood when the war began in late February, and that the seven Western oil majors’ bumper profits this year will therefore not be repeated in 2027 and 2028.
Source: LSEG Refinitiv data
“Analysts and investors seem to remain convinced that any after-effects from the war upon global oil supply and demand will be limited, and that hydrocarbon assets remain at risk of being stranded as the globe transitions toward more renewable sources of energy.
“The seven Western oil majors of BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies are not expected to generate profits this year that match those of 2022, when oil and gas prices soared in the wake of the Russian attack on Ukraine, or equal those of 2026 in the next two years.
Source: Company accounts, Marketscreener, consensus analysts' estimates for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell, and TotalEnergies
“This in turn helps to explain why the share prices of the oil majors are not showing more spark. The septet did set a new all-time high for their aggregate stock market valuation at just under $2 trillion last month, but their combined price tag has since retreated slightly to $1.8 trillion as markets have priced in a resolution to the war.
Source: LSEG Refinitiv data
“Markets’ lack of conviction in the near- and long-term outlook for oil is also evident in how the major producers’ combined valuations languish near historic lows on a relative basis. The S&P Global 1200 Energy sector’s market cap represents just 3.7% of the overall S&P Global 1200’s index’s valuation, way below the long-term average of 7.6%, let alone 2007’s peak of 14.0%, reached when oil hit $147 a barrel.
Source: LSEG Refinitiv data
“This dwindling representation within the wider indices is a reflection of greater interest in other sectors, notably the booming technology sector, as well as indifference towards energy.
“The fascination with all things related to artificial intelligence means other sectors are suffering varying degrees of neglect and the $1.8 trillion market cap of the seven Western oil majors pales next to the $23.6 trillion combined valuation of the so-called Magnificent Seven of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
“Analysts believe that Nvidia will match the majors’ operating profit on its own in 2026 and then generate higher profits still.
“Consensus estimates are looking for the Mag7 to generate combined operating income of $935 billion in 2026, with further gains to come in 2027 and 2028, in contrast to Big Oil, where earnings are expected to fall.
“This expectation of future growth on one hand, and the absence of it on the other, explains why the Mag7 are expected to make 3.6 times as much operating profit as the seven Western oil majors but have a combined stock market valuation that is 13.4 times bigger.
Source: Company accounts, Marketscreener, consensus analysts' estimates for Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla
“It can be argued that this valuation disparity ignores risks on one hand and the ongoing importance of an unloved sector on the other.
“No-one knows how the spending spree on AI by six of the Mag7 is going to pan out, especially as OpenAI, Anthropic, DeepSeek and others are spending heavily in their quest for a piece of the action. No-one knows what returns on capital are achievable or who the winners and losers may be in an industry that is notorious for obsolescence risk and fast-moving cycles.
“But everyone knows that hydrocarbons are still the dominant source of power in a world where, in its crudest form, economic activity is simply energy transformed. Moreover, AI will be a huge consumer of power going forwards and there remains the chance that hydrocarbons are part of the solution to that problem, even if there is a clear drive toward less carbon-intensive options here, including solar, wind and potentially nuclear power.
“It will also be interesting to see how the valuations – and financial data – from proposed AI-related initial public offerings stack up relative to the more established profit and cash flow streams of Big Oil if, as and when they come to market, in light of some of the very large figures being bandied about in terms of the putative market capitalisations of the newcomers.”
