Where Now For Oil? From Charlie Hancock
In late April, oil prices sunk to their lowest point since 1999, with the widely quoted Brent crude spot price falling to $19 per barrel. At the time of writing, Brent crude has recovered to $42 per barrel, which is still a considerable amount lower than the $67 mark seen at the beginning of the year. Oil prices have been highly volatile so far during the coronavirus crisis, with oil traders attempting to navigate rapidly falling demand due to global lockdowns together with issues of excess supply.
The events of recent months have caused widespread debate about the future for oil prices and businesses operating in the sector. Indeed, Royal Dutch Shell announced earlier this week that they intend to write off between $15-$22 billion from the value of their assets in their 2nd quarter accounts. This follows a similar move from BP earlier in June. Both oil giants have taken steps to shore up their balance sheets in the face of weak oil demand, including cutting capital expenditure and raising new debt.
Some oil majors have cut dividends and cancelled share buy-back programmes, which will reduce shareholder returns in the short term, but improve the potential to maintain a healthy return on capital in years to come. Shell and BP have paid attractive dividends in the last few years and many investors will be holding onto their shares in the hope that this resumes. Royal Dutch Shell have forecasted that Brent crude will return to $60 per barrel by 2023, which, interestingly, is in line with their long-term estimates made before the coronavirus crisis.
When considering the scale of lockdown measures taken around the globe in an effort to contain the coronavirus, it is easy to see why demand for oil plummeted. The fall in prices however was exacerbated by issues on the supply side, with a disagreement between Saudi Arabia and Russia having a particularly severe impact in early March.
Over the last couple of months, demand has been rising as the world emerges from lockdown measures. In addition, oil producing groups such as OPEC have been taking measures to resolve supply side issues. Many nations, including Saudi Arabia and Russia, receive significant amounts of revenue from state owned oil companies and there is therefore a vested interest in ensuring supply is controlled to support oil prices.
Some are speculating that the coronavirus crisis will speed up the move to renewable energy sources and result in permanently reduced demand for oil. A greater number of people working from home means fewer daily commutes and reduced fuel consumption. Whilst this theory may prove to be true in developed nations, oil demand in the emerging world, which already accounts for over 50% of consumption, will continue growing. Even in rapidly growing green industries such as the electric vehicle (EV) market, oil is still a valued commodity – Tesla use vast quantities of plastic to make their vehicles and rely on fossil fuels to transport parts, vehicles etc.
To meet climate change targets and move to a more sustainable way of life, investment into green energy needs to continue accelerating, however, the 2020’s are unlikely to be the decade in which we see the ultimate demise of oil. As a result, there is plenty of reason to believe that oil prices and oil stocks will recover from current levels.