Since 2014, oil has been the main focus in the commodities markets worldwide. With Brent Crude oil falling from a high of around $115 a barrel, to a low of $28 a barrel, anybody is going to take a peek at what was going on in the interim.
Last year’s agreement by both OPEC and non-OPEC to cut production signified a change in market conditions for both investors and speculators. Higher energy prices. But what has actually happened? And where does the future lie?
Since the low of $28 a barrel seen in early 2016, oil has in fact doubled in value, now trading around the $55 a barrel handle. With OPEC countries remaining profitable even at these previous lows, problems arise for domestic oil giants – Royal Dutch Shell and BP.
Break-even points around the $60 barrel mark means future dividend payments for BP are coming under pressure over the long term. Net debt has climbed to £35.5bn from £27.2bn a year before with the costs associated with the 2010 Deepwater Horizon disaster continue to mount ever higher.
Royal Dutch Shell profits have declined by £4.3bn to £7.2bn in 2016. According to the Company, it could continue to break-even with Brent Crude oil being in the $55 a barrel region. This looks okay based upon today’s price activity, but should the oil price continue to fall, more trouble lies ahead.
Ultimately the share prices of both companies have continued to fall to the downside over the longer term. Our founder, Christian Evans says ‘The main issue surrounding the oil price crisis is that it is supply-led factors contributing to its demise. Unfortunately, due to global reliance, producer is King.’
The glut of oil is an embedded problem and is rising, not falling. General economics dictates that these supply-led issues will invariably take longer to rectify, compared to those issues associated with demand. Demand issues can be reduced with government intervention almost overnight.
Projections of $100 a barrel oil seemed ambitious at best back in 2016. Christian Evans added ‘Analysts must have understood there was a reason for the continued fall. You can not expect a fall of that magnitude to be fully retraced almost instantaneously.’. Further pressure was seen last week with oil inventory expectations of 2.4m barrels was blown out of the water with a figure of 14.2m barrels being released.
Motley Fool says ‘Rising shale supply is also offsetting the production figures. The Baker Hughes US rig count is up 200 in the last year to 741. Wall Street is pouring money into oil, yet investors are banking on the price continuing to rise, holding a record number of long positions.’.
Investing in ‘strong’ companies such as BP and Royal Dutch Shell has always been a long-term investment of choice by most private investors. With the belief of oil prices continuing to rise, alongside positive and consistent dividend yields, investors have been flocking to these blue-chip equities for almost three decades – 2010 exempt.
‘Oil will always go up’ has left many at the side of the road. With BP and Royal Dutch Shell still at the mercy of OPEC countries, it is still hard to see the longer term growth prospects. Will we see further price declines in the oil market? Who knows. But what is certain is that the supply issues faced will not disappear overnight.