Its been a shocking start to the year for global stock markets in general and the oil price in particular. A barrel of Brent crude has fallen to a 12-year low of$34 and theres no sign of it bottoming out. Thats astonishing as you might have expected the opposite to happen, given soaringtensions between Saudi Arabia and Iran, the worlds largest and fourth-biggest oil producers, respectively.
Glut of black gold
Geopolitical troubles could easily trigger an oil shock that could send the price spiralling upwards as fast as it has fallen. Yetmarkets cantbring themselves to thinkabout that prospect with the world swimming in an absolute glut of the black stuff.
When the oil price falls, even vertically-integrated oil majors like Royal Dutch Shell (LSE: RDSB) fall with it. Shell is down 30% in the last year and 4% so far in 2016. Smaller explorers such as PremierOil (LSE: PMO) have it even harder. Its share price is down 76% over 12 months, and a shocking 24% in the last week. Both are having a tough time, andtimes mayget tougher.
BG or not BG?
Management at Shell has the further issue of integrating recent acquisition BG Groupin a deal that has manycritics. Ian McVeigh at fund manager Jupiter has likened it to Royal Bank of Scotlandsdisastrous takeover of ABN Amrojust before the financial crisis. This weekinstitutionalinvestorCapital Group, which also holds a sizeable Shell stake, has more-than-halvedits holding in BG from 2.2% to 0.9% in protest.
Shell now yields an astonishing 8.22% but its hard to see how this can be sustained for much longer with the oil price sinking and profits plunging. Weve seen too many dividends fall over the last year to be shocked by the notionthat Shell will have to cut as well, despite its cherishedrecord of never having done so since the war.
Premier plunge
Premier is likely to post a110m pre-tax loss for lastyear, although optimistic forecasts suggest this should convert into a 38m profit in2016. But investors are right to be running scared right now, as Premiers forecast debt total of $2.7bn is based on the fantasy price of oil at $58 a barrel. WhilePremier can survive 2016, its share price will suffer at the hands of plunging sentiment.
Worryingly, theoil price could dropfurther as Iranis likely to pump with abandon once sanctions are lifted. Iranseconomy is more diversified than Saudis, which draws 80% of its revenues from petrol, and itcalculates that its pain thresholdis far higher. Saudiseems to be making the same calculation: one of them will be wrong.If tensions rose even higher and Iran threatened oil supplies through the Straits of Hormuz, the sky would bethe limit for the oil price.
Also, plunging oil investment will eventually hit supply.Oslo-based consultancy Rystad Energy forecasts that worldwide oil and gas investments willslide to a six-year low of $522bn this year, following their 22% fall to $595bn last year. At some point, oil has to recover. But even that may not be enough to save Shell and Premier. US shale is the new swing producer, that could limit future price rises to $50 or $60.
2016will be a tough year for Shelland Premier, and the longer-term outlook is troubling too.
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