Rising prices in the Middle East revive oil companies on the stock market | Companies
It wasn’t just the big oil-producing countries gathered around the once all-powerful Organization of the Petroleum Exporting Countries (OPEC) that had to endure difficulties: Western oil companies, and especially European ones, had been suffering for months from falling oil prices, which had risen from $90 to $70 per month in less than six months. barrel, and the prospects for demand did not please their interests at all. Everything changed in the blink of an eye: Brent returned to the $80 per barrel zone for the first time since mid-July.
This reversal of the scenario, with the market anticipating something to happen in the Middle East, brings profits to the weakening oil companies. Who knows for how long – the future seems written: the world is not moving quite the way these companies and countries would like – but Western fossil giants appear to have put the worst phase of their difficulties behind them.
Growth in recent days has allowed US company ExxonMobil to confirm its all-time high with a valuation above $500 billion. In Europe, having lost a quarter of their capitalization in just six months, Spain’s Repsol and Britain’s BP have regained some of their lost ground over the past two weeks. Anglo-Dutch Shell, France’s TotalEnergies and Norway’s Equinor are even recouping the losses they suffered in the summer, when a drop in crude oil disrupted the sector’s structure. All of these are still a long way from testing the honey that Western stock markets are set in due to the recent (and upcoming) interest rate cuts. But the bleeding at least seemed to have stopped.
Until Iran attacked Israel last week, driving up crude oil prices, Western oil companies were being targeted on several fronts. Oil was falling. The refinery restrictions that once made them so much money are long gone as the pieces of the puzzle fall back into place following Russia’s invasion of Ukraine. And extraordinary profits, very extraordinary ones, evaporated in their income statements.
The consequence of all this is that high ratings on trading platforms have disappeared. This pattern, again, is particularly exacerbated in the case of European oil companies, which, according to data published previously, have gone from trading at a historical 20% discount to their US counterparts over the past two decades to trading at 40%. several days by the American investment bank Goldman Sachs. This gap, although somewhat smaller after the recent stock market rally, still remains.
“We favor the most defensive options with strong earnings reports, less sensitivity to crude oil prices and low margin thresholds,” the paper said in a report. A group in which two European names stand out: Shell, which even with a crude oil price of $70, to which it fell shortly before the hornet’s nest in the Middle East became even more difficult, is able to maintain its dividend and continue to buy and repurchase own shares and Equinor. On the other hand, Repsol will suffer the most from a sustained fall in energy commodity prices.
Less demand
Leaving aside the situation in the Middle East, the background remains the same as a few days ago. China, the world’s largest importer of crude oil, has long crossed the Rubicon of peak demand: it can only fall from now on due to the push from electric vehicles. And the International Energy Agency itself (IEA, the energy analysis arm of rich countries) points to an overwhelming surplus of crude oil on the world market in 2030.
Before the Iranian attack—and in anticipation of a response from Israel, which is considering bombing oil facilities in Tehran, the world’s seventh-largest crude oil producer—Goldman Sachs economists even briefly forecast a price of $60 a barrel in 2025 under three scenarios: in response to recent stimulus package, that Donald Trump will win the election and make good on his promise to impose universal 10% tariffs on all US imports (which will reduce global energy demand) or that OPEC will eventually give in and reverse its current cuts, around 2. 2 million barrels per day. All scenarios are plausible regardless of what is happening in the Middle East.
The increasingly likely possibility that Saudi Arabia and its OPEC friends will end the supply cuts they have used to try to stem falling prices would be bad news for oil companies. Riyadh’s new policy is designed to push higher-cost producers out of the market, especially US fracking giants (hydraulic fracturing)— will put further downward pressure on prices. And this will again complicate the situation for Western companies in the sector, all of which have relatively high production costs compared to the Gulf oil states.
Gas companies in long-term problems
Faced with fluctuations in crude oil prices, gas prices have shown remarkable stability. Despite the full capacity of European reserves for the winter, it has not fallen far, and now this fuel is traded on the Old Continent at almost 30% higher than at the beginning of the year. However, forecasts for the rest of the decade are bleak, with new wells and liquefaction terminals coming on stream, as well as reduced demand for power generation – driven by renewables – threatening to push prices down significantly.
“The LNG (liquefied natural gas that is transported on ships) market will experience significant volume growth from 2025, especially in Qatar and North America,” forecast technical experts at Goldman Sachs. “We believe this supply wave will trigger a bearish cycle in global gas markets that is likely to last into the second half of this decade.”
The impact of this fall on European mining companies should be “limited” in the very near term, as much of the volumes they sell are pre-priced. However, a glut of global LNG supplies will “impact its profits” later, the US investment giant warns.
Of the companies analyzed by Goldman Sachs, Norway’s Equinor would be most affected by falling gas prices in Europe, while France’s TotalEnergies would be most exposed to liquid gas markets. Shell, BP and Repsol are less reliant on gas revenues, with their profit and loss reports dancing to the sound of crude oil. And therefore depends a lot on what happens or doesn’t happen in the Middle East. This is where all eyes are directed today.