Big Oil shareholder payouts under threat as prices fall

After years of high oil prices and tight market control, the tide is turning for OPEC+, and Big Oil may be about to crumble under the weight of its own distribution. Benchmark Brent crude recently fell below $70 for the first time in three years, and this week the International Energy Agency (IEA) said it expected prices to continue to fall.

“Given the current weak demand and a lot of oil coming from non-Opec countries, mainly America and others, we may see downward pressure on the price,” said Fatih Birol, head of the EIA.

Oil prices have risen since Russia’s invasion of Ukraine prompted major energy sanctions, creating favorable conditions for tight global crude supplies and considerable market control by OPEC+. But now, “the mood among traders and speculators has turned sharply in recent weeks amid weaker growth in China and the US, prompting OPEC to delay a plan to start reversing cuts of more than 2 million barrels a day,” Financial Times. reported Thursday.

According to Birol, the main culprit for the slowdown is the weakening of oil demand from China. “Over the past 10 years, about 60% of the growth in global oil demand has come from China. Now the Chinese economy is slowing down,” Birol said. Years of booming growth have reached their peak, and Beijing now faces a protracted housing crisis characterized by legions of unfinished housing, mounting debt, weak consumption patterns and skyrocketing unemployment rates, even as the country graduates its most large cohort of registered students. – 11.9 million.

All of this is a big problem for Big Oil. For the past three years, shareholders have been rejoicing exceptional payments as the oil supermajors went wild. “This quarter alone, ExxonMobil Corp., Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc plan to buy back more than $16.5 billion in shares,” reports Bloomberg. “On an annualized basis, that equates to $66 billion a year, or about 5.5% of Big Oil’s current combined market value.”

But now investment banking firm Jefferies Financial Group Inc. warns that this model is fast becoming unsustainable as oil prices fall and that about half of international oil companies “cannot sustain their distribution” without becoming increasingly indebted. Indeed, the shift will prove to be a stress test for many oil companies, which may not survive the recession unscathed.

It appears that OPEC+’s prevailing boom-time strategy – “withholding supply at juice prices and incomes for its 23 members is sustainable” – may be just as unsustainable. Recent attempts to stimulate the market by delaying the increase in supply have had virtually none of OPEC’s desired impact on oil prices, instead coinciding with benchmark Brent’s three-year low. Wall Street is wondering now if OPEC and its allies will do a complete pivot and reverse the production cuts to try to start a market share war.

India is strongly expressing his opinion that OPEC should do just that. India is the world’s third-largest oil importer and consumer and wants to lower pump prices while meeting its own growing demand. And India’s position holds increasing influence in oil markets as China’s presence declines. “With China already behind its forecast trend, other Asian countries will become increasingly indispensable to oil demand growth,” the IEA says.

However, OPEC remains much more bullish on the oil outlook than the IEA. While the EIA estimates that global oil demand this year will increase by 903,000 barrels per day, OPEC expects a growth rate of 2.03 million barrels per day this year and 1.74 million barrels per day next year .

By Haley Zaremba for Oilprice.com

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