Analysts have always assured usthatlarge vertically integrated oil majorsare more than just a play onfossil fuel prices. The collapse in the oil price over the last year, and the parallel collapse in their share prices, has now erodedthat comfortingillusion.
One year ago, Brent crude was trading at around $100 a barrel. Today, you can buy abarrelfor just $50. Over the same period, the share prices ofBP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) sufferedsimilarly catastrophic falls off 26% and 35% respectively.
This works in the other direction, too. When oil futuresleapt 8% on Monday, BP and Shell suddenly recouped 3-4% of their share price losses. Where oil leads, the FTSE 100-listed majors broadly follow. So the big question overhanging both these stocks is still this: where does oilgo next?
The clouds hanging over the sector suddenly lifted earlier this week, with oil enjoying its largest three-day surge since 1990, rising more than 25%, or around $10 a barrel. It was beginningto look like somebody had fired the starting gun on a bull market in oil.
The surge was partly fuelled by rumours that OPEC was open to talks on cutting supplies, allied to reports that US first-half oil production had been overestimated by 250,000 barrels per day (bpd), and revised downwards to 9.3m bpd. Oil has flattened again. The short-lived spike now looks like yet more market volatility, one of Black Mondays many after-shocks, rather than anything substantial.
Selling It Short
Such a rapid move upwards also invite suspicions. It was almost certainly fuelled by short traders covering their positions after betting heavily that oil would fall further. As short-term volatility calms, markets will focus more on underlying long-term economic factors, and they dont look so hot right now.
The oil price may have leapt25% but demand fromChina certainly hasnt. The authorities are so rattled by the countrys slowing economy they have taken to arresting scores journalists and financial executives. Manufacturing PMI figures are slidingeverywhere, including the UK, as global trade slides. US jobless numbers are up. OPEC didntagree to cut production. US frackers are more resilient than anticipated, aided by plungingdrilling costs. If oilrises again they will quickly ramp up their activities, capping any increase. Russia is pumping oil, even at a loss. Iran is on the way to market, ifCongress approves the recent nuclear deal.
Over A Barrel
Think carefully beforerushing back into BP and Shell, because they continue to have a long and hard road ahead of them. Talk of an oil bull market is dangerously cheap. Both stocks dolook tempting, given recent share price falls and theirstonking yields of around 7%, which should be good for another year or so, even at todays low oil prices. But you have to accept that oil could fall again, and if it does, BP and Shells share prices will surely follow.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.