Last year, there was already speculation that the price of crude oil could rise to $100 a barrel. It did not seem terribly surprising, considering that the recovery was underway and demand was clearly outstripping supply. Further, keeping in mind that travel was likely to pick up soon, demand for oil was expected to gain further strength. Then late last year, reports started doing the rounds of crude oil forecasts at $150/bbl this year and the number of voices saying this have only gained ground since. This is an almost 75% increase from the current price, which could have huge implications for FTSE 100 stocks.
FTSE 100 oil giants could be big winners
The two most obvious stocks it has implications for are the oil giants BP and Royal Dutch Shell. After languishing during the pandemic when demand for oil plunged, taking the price along with it, they swung back into profits last year as things started opening up. Even without predictions of oil prices at $150/bbl, I was of the view that there is significant upside to these stocks.
They are still trading below pre-pandemic prices, though that could change soon as they continue to rake in profits and their dividends rise. In my opinion, oil stocks maybe be to 2022 what mining stocks were to last year. A massive rally in the price of the commodity produced leads to a dividend bonanza for investors, essentially.
Of course, over the long term, oil companies are still on shaky ground as the move towards green energy continues. And they might or might not be able to successfully transition into clean energy producers. But for the medium term, I think they look good. I bought both of them a while ago, and they have stood me in good stead. I could add to my holdings now.
Stocks that could be adversely impacted
But while these are good stocks to buy, there are other stocks that have become riskier to hold. The reason is simple. Higher oil prices mean higher inflation. Price rise is already out of control and could well eat into profits for FTSE 100 companies. One of them could be the grocer Tesco, whose sale of non-essential and price-sensitive products could suffer.
Another is Rolls-Royce. It has already been impacted by the travel bans of 2020 and 2021. Even now, travel is far from its pre-pandemic levels. And if airlines rising costs’ show up in prices, we might not be inclined to travel very much in 2022 either. I would watch out for both stocks’ next updates to figure out exactly how inflation impacts them and decide whether to buy them or not. It could be that they are able to either pass on price rises effectively to customers or their industry is not impacted as much as expected right now. But it is clear that the winners for 2022 will most likely be oil stocks.
Manika Premsingh owns BP and Royal Dutch Shell B. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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