Interactive Investor

Energy stocks riding high after oil price hike called

2nd June 2021 13:05

Graeme Evans from interactive investor

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Latest OPEC+ meeting spells good news for Brent crude.

Support for energy stocks continued to flow today after a leading City bank forecast further upside in the Brent crude price following the latest meeting of OPEC+ ministers.

UBS, which sees the energy sector as among the main beneficiaries of the broader global reflation trend, highlights three reasons why it expects higher oil prices will be sustained.

It points to progress on the vaccine roll-out, particularly in the US where the start of the summer driving season should mean gasoline demand rises towards multi-year highs.

In a note to wealth management clients, the Swiss bank said: “Overall, we see gradual normalisation of domestic and international travel, bringing global oil demand toward 2019 levels next year.”

Brent crude has established a firm foothold above $70 (£49.53) dollars a barrel, but UBS doesn't think this more helpful pricing environment will lead to US shale producers ramping up production in the way they did before the pandemic.

The bank said: “Shareholders are likely to require more discipline on investing. Instead, we expect shale drillers to use more extra cash to raise dividends and repay debt, exercising greater restraint on drilling.”

The third point is that the oil majors are under more pressure to curb drilling, with Royal Dutch Shell (LSE:RDSB) recently told by a Dutch court to lower its emissions faster than current goals.

UBS said: “Such pressures could constrain new investment projects in oil, adding upward pressure on prices. Several European oil majors have already been turning their focus to investment in renewables.”

Brent is now trading at close to its highest level since May 2019 as the global economic recovery picks up speed, but the bank sees the Brent price reaching $75 a barrel amid high levels of discipline among members of the OPEC+ alliance.

Yesterday, ministers continued their policy of gradually easing pandemic supply curbs, with output set to increase by 700,000 barrels per day this month and by another 841,000 in July.

The OPEC+ alliance will meet again at the start of next month to discuss output for later in the year, but UBS said it was clear they remain in full control of the oil market.

It told clients: “With less drilling from non-OPEC+ producers, it has been easier to ensure that production cuts support prices — rather than handing market share to rivals.

“The group has also introduced a ‘cut, comply, and compensate’ system that requires member states to make up for prior over-production.”

BP (LSE:BP.) and Royal Dutch Shell investors have benefited from the latest OPEC+ developments after their shares rose as much as 2% today. BP later settled at 318.5p, not far from the one-year high set in March and a significant improvement on the pandemic low of less than 200p in October.

It recently announced a new share buyback programme, having also initiated a strategy to become an integrated energy company - solar and wind as well as fossil fuels.

Royal Dutch Shell, which last year cut its dividend for the first time since the Second World War, was trading at 1,324.6p today. Its share price progress has been more measured and is stuck in a narrow trading range since March, despite UBS having a price target of 1,860p.

The Anglo-Dutch giant said last year it planned to build low-carbon businesses of significant scale by the early 2030s, but with upstream operations continuing to deliver vital energy supplies and the cash needed to accelerate the transition to these growth businesses.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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