BP and Shell shares under pressure again

Celebrations following a recent recovery seem premature after oil stocks fell again this session. City writer Graeme Evans explains why, and which shares the City fancies.

15th October 2024 13:05

by Graeme Evans from interactive investor

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BP (LSE:BP.) led more heavy selling in the energy sector today after bearish demand forecasts and reduced fears of Middle East supply disruption cut the price of Brent Crude by 5%.

The 20p decline in BP's share price to 388.5p returns the widely-held FTSE 100 stock to near the two-year low of 26 September, having recovered at one point in early October towards 422p.

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As well as Brent Crude now trading at less than $75 a barrel, sentiment towards BP has weakened after Friday’s trading update warned of a $600 million hit to earnings due to the ongoing industry-wide pressure on refining margins.

UBS responded to the update by cutting its net income estimate for third-quarter results due on 29 October by 7% to $2 billion, despite upstream production above expectations. BP also said net debt will be higher than expected due to sale proceeds being deferred to the fourth quarter.

The oil giant topped today’s FTSE 100 fallers board and is down by about 17% year-to-date, while Shell (LSE:SHEL) fell by 95.5p to 2,494p and is now about 3% lower since the turn of the year.

Anglo American (LSE:AAL) and Glencore (LSE:GLEN) also suffered this morning as prices of other commodities including copper fell on fears that China’s stimulus efforts may not go far enough.

On Monday, OPEC cut its oil demand forecast for this year and next for the third month in a row and the International Energy Agency (IEA) lowered its 2025 growth estimate to one million barrels a day.

This marks a sharp slowdown on the expansion of two million barrels seen over the 2022-2023 post-pandemic period. China underpins this deceleration in growth, accounting for around 20% of global gains both this year and next year compared to almost 70% in 2023.

As highlighted in recent updates by Shell and BP, the IEA said refining margins slumped further in September as global product stocks have swelled to three-year highs.

The other factor driving today’s fall in Brent Crude futures concerned the Middle East after Israel reportedly ruled out attacking Iran’s oil and nuclear installations.

The market had been fearful given the potential for disruption at the country’s main Kharg Island export terminal, which primarily ships to China, and in the strategic Strait of Hormuz.

The IEA concluded in its report: “For now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizable surplus in the new year.”

The forecasts by the IEA and OPEC come shortly after it emerged that Saudi Arabia may abandon its $100 a barrel price ambitions in favour of protecting market share.

Brent Crude had been above $85 a barrel in July, helping to bolster the cash flows of BP and Shell and giving them scope to cut debt and increase distributions through dividends and buybacks.

An oil price now firmly below $80 has heightened City concerns about the sustainability of those returns in 2025. That’s particularly the case at BP after below-par first quarter results and July’s warning of headwinds including refinery impairments cut shares from 540p in April.

Bank of America said in the summer that it favoured TotalEnergies SE (EURONEXT:TTE) and Shell at a time when range bound oil and gas prices, little organic volume growth and weaker refining margins put the industry’s aggregate cash flows under pressure.

It warned BP’s buyback commitments looked unsustainable assuming $80 a barrel next year.

This month’s developments increase the pressure on chief executive Murray Auchincloss amid speculation he may drop BP’s ambition to cut oil and gas production by the end of the decade.

UBS, which has a price target of 550p, said on Friday: “Sentiment is extremely weak on the name and we see the next key catalyst to help change that in February when we expect the company to update its strategy.”

Shell reports third-quarter results on 31 October, with some of the downside for its shares limited by a run of resilient figures and the strengthening of its cash flows amid the capital and spending discipline of chief executive Wael Sawan.

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