StockBeat: Oil Majors Struggle as COP, ECB Overshadow OPEC

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By Geoffrey Smith — It’s been a tough week for the oil and gas sector.

The price of its main commodity has risen by over $2 – nearly 4% – as the cartel that produces over 40% of the world’s output has moved toward a significant tightening of its policy, but the share prices of Europe’s big names are mostly down on the week, reflecting a growing number of longer-term concerns. The big four European majors are all down on the week, by between 0.6% and 2.6%.

For one thing, there’s the worry about whether the action agreed by OPEC and allies led by Russia will actually be enough to stop a fresh glut on world markets next year. The ‘OPEC+’ grouping has reportedly agreed to take another 500,000 barrels a day of oil off the market through the end of 2020, but whether that will be enough to offset rising production in Brazil, Norway and – the big wild card – U.S. shale is far from clear – especially if the U.S.’s attritional trade war with China continues to depress world oil demand.

London-listed BP (LON:) and Royal Dutch Shell (LON:) can at least argue that some of their weakness is due to exchange rate effects: the pound has rallied strongly this week, reducing the value of their dollar-based income streams. But that doesn’t explain away Total’s and Eni’s limp performance.

The truth is – the OPEC meeting in Vienna is not the only game in town. Across the continent in Madrid, the UN-sponsored COP 25 talks on climate change have sharpened the focus on the growing hostility to the very notion of oil and gas, even though there is currently no way of maintaining living standards in a world without the two sources that meet the overwhelming majority of the world’s primary energy needs.

The sector has been under siege from the growing might of the sustainable investing lobby for years, and now the authorities appear to be taking the ESG side too: incoming European Commission President Ursula von der Leyen has pledged to make the continent carbon-neutral by 2050, and Christine Lagarde is likely to throw the European Central Bank’s considerable influence behind that push when she launches her strategic review of ECB policy, probably at her first governing council meeting next week.

The ECB’s action could include, for example, banning the sector’s bonds from its asset purchase programs. It could also, as bank supervisor, apply higher capital charges on loans to the sector (ironically so, given that the majors in particular have rock-solid credit ratings). The central bank could also pull its own pension money from the sector’s bonds and stocks. All three measures would raise the majors’ cost of capital, the first two especially.

The majors’ stock prices have always been supported by the assumption that they are indispensable to the modern economy. That assumption is going to be tested with growing severity every year in future.

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