It’s a bit of a secret that the FTSE 100 oil inventory was absolutely hit in 2020, and today’s stock price drop seemed to add icing to the rather overwhelming cake. If you’re confused about why this is particularly important today, here are some reasons why it might be.
Number 1: Crude oil prices are slowing
Yes, I know, I’m very obvious, but also necessary. Oil prices recovered have lost steam in the past few months and fluctuated, as Brent Durude climbed from the $19.30 NADIR in March, and as it rose to $46.29 in August.
This pattern is largely reflected by WTI crude oil. The WTI, which peaked at over $63 per barrel in January, fell to over $12 in March, gathering above $43 throughout August, then lost momentum and today to $39.51.
The two oil price indices flowed 3.42% and 3.73% on Thursday, respectively. This is not something you want to see if you’re hoping to recover from petroleum stocks.
Number 2: Expensive Clean Energy Transfer
The oil major knows that a cultural change in the energy industry is ongoing, increasing pressure from activists, media, consumers and financial institutions. They can be carried towards this change, kick, scream, move with the times and take the expensive hits that come with aggressive shifts to renewables.
FTSE Oil Giants, Royal Dutch Shell (LON: RDSA) and BP (LON: BP) have decided to do exactly what they announced in 2020 that they will undergo earthquake transition through the acquisition of clean energy assets.
Between RDS, which pledges a budget of up to $4 billion a year for new energy businesses and BP, aiming for carbon neutrality by 2050, expensive operational overhauls could be reflected in short-term hits on revenue, but could also translate into protections for long-term returns.
Number 3: Financial institutions phase out high carbon-derived support
This latter point could be a long-term driver of oil and gas producer risk, institutional investors and central banks find that supporting high-carbon companies is at odds with environmental goals and what is required of investors and society as a whole.
In fact, the Bank of England announced over the summer that its bond buying strategy is inconsistent with the climate prevention goals and is considering a change in its focus on green bonds. Similarly, more relevant, perhaps ECB president Christine Lagarde announced yesterday that he would consider a shift from “neutrality” in corporate bond purchases to a methodology that is a factor in environmental risk.
She told viewers of the UN Environment Programme Finance Initiative event:
“I’m not judging the fact that it should no longer be, but that guarantees the question, which is what we’re trying to do as part of our strategic review.”
“(…) there is a possibility that the financial markets themselves are not actually measuring risk properly and may not price it, so much more needs to be done.”
Lagarde also said that central bankers would have to ask themselves questions about whether they are taking excessive risks simply by trusting mechanisms that are not based on the massive risks there.”
Similarly, we were able to see a change in institutional investors’ attitudes in pursuit of stricter, more rigorous, responsible investment standards implemented by pension funds and mutual funds. In fact, Temple Bar Investment Trust Director Lesley Sherratt is calling for a shift in RI goal posts, saying that if institutional investors apply more limited but demanding standards, companies are obligated to change their business models to qualify for a responsible investment portfolio.
The situation appears
While traditionally a formidable class of stocks, the oil major appears to be at the wrong end of a major trend in 2020. Fossil fuel consumption is outdated.
That’s not to say we don’t need oil or it won’t bring about a recovery, but at this point, the pandemic means fuel consumption is as low as in recent history and renewable energy enthusiasm has more traction than ever before.
Currently, all major FTSE Oil stocks are struggling on Thursday. Shell share fell by 4.77%, BP fell by 4.21%, Taro Oil (LON: TLW) fell by 7.11%, dropping to each lower level since the turn of the century, but it may be lower for more than three years if you care to check it yourself.
