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Oil may float on water, but its days of floating above slowing global demand growth look numbered. Having briefly dipped below $70 a barrel, it could well sink further. That is bad news for oil and gas companies, of course. But it leaves European majors, whose equity appeal has largely focused on buybacks and dividends, in need of a new sales pitch.
Oil’s main problem is that consumption in China has actually started to fall, with the impact of a weak economy exacerbated by the increasing penetration of electric vehicles and high-speed rail. That will translate into a global growth rate for this year and next that is below 1mn barrels a day, or less than 1 per cent of global consumption, according to the International Energy Agency.
Such slivers of demand growth are easily filled by new oil coming on stream in Brazil and Guyana and other non-Opec producers. That leaves the cartel in an uncomfortable position: maintain its cuts and cede market share, or risk flooding the market. It is unlikely to choose production over price because supply growth comes from cheap, long-cycle projects which could withstand the pain. But even assuming its members do not break ranks, the threat of ample spare capacity that can quickly be brought back on stream will keep a lid on the oil price.
That leaves oil majors looking at prices which might well average $10-$15 per barrel less than they did in 2023. A rough and ready rule of thumb might see cash flow declines of $0.50 per barrel for every dollar lost on the oil price, thinks Christopher Wheaton at Stifel, meaning some $30bn annually across the global big five’s upstream production portfolios. The impact of weak refining margins and, potentially, lower trading gains from less volatile flows, comes on top of that.
Lower cash flows will blow a hole in the majors’ distribution policies. Most were paying over half their cash flows out to investors in dividends and buybacks, according to Citigroup analysis. They will have a lot less to play with going forwards. True, the group as a whole exits this oil bonanza with strong balance sheets. But leveraging up to fund buybacks would be a hard sell.
This leaves oil majors in need of a new story to tell investors. The problem is less acute for those companies — mainly in the US — which have sizeable opportunities left in their core business. Being able to point to shale consolidation benefits for Exxon or growth from new resources is helpful. But in Europe, where more capital is being poured into low carbon, energy transition businesses, the challenge to convince investors that these have a profitable future just got more pressing still.