Oil price continues to fall, but large groups do not just give up on dividend payments
An imminent lack of storage options, persistently low demand and investor mistrust have further increased the pressure on oil prices. A barrel of American oil WTI (West Texas Intermediate) cost about 10 dollars during Tuesday. Four months ago, the price was still at $60. Oil in Europe also became even cheaper. A barrel of Brent oil fell below $20.
On Monday, investors put additional pressure on the price. Then an American mutual fund, United States Oil Fund, announced that it would sell its oil futures contracts for June. After this announcement, the price for a barrel of WTI fell by almost a third. Due to the limited storage space, stockpiling is becoming more and more expensive and there is a growing fear among traders that they will not lose their oil.
Oil supply and demand have been out of balance for months. Due to the economic and social stagnation as a result of the corona virus, the demand for oil has fallen by a third. Production agreements made by the oil cartel OPEC and Russia will not take effect until May 1, and the agreements are generally expected to fall short. Against an estimated 30 million barrels per day drop in demand, OPEC+ (including Russia) will cut production by nearly 10 million barrels. It is expected that the low oil price will cause US shale oil production in particular to decline, as many companies will run into financial difficulties.
Last week, the expiration of futures contracts caused the price of US oil to turn negative for the first time in history. Due to a dire lack of storage options, traders wanted to get rid of their oil on the last day before the expiry of futures contracts.
The new price fall will take place the week that many oil companies announce their results for the first quarter. BP took the lead on Tuesday and announced a profit fall. In the first three months, the company made a profit of 791 million dollars (727 million euros) compared to 2.4 billion in the same period last year. The corona crisis was especially disastrous for March, the last month of the quarter.
“Our industry has been hit by unprecedented supply and demand shocks,” said newly-appointed CEO Bernard Looney. He announced “decisive” measures to strengthen the company’s financial strength, such as rapidly reducing expenses and costs. The CEO announced in February that BP must become more sustainable. For example, the group must CO . by 2050 at the latest2-operate neutrally, including in terms of emissions released when customers use BP fuel.
Across the Financial Times Looney said on Tuesday that he would maintain this ambition, despite the pandemic. “I don’t see the climate debate disappearing (…), it can be encouraged by what we see now.”
Despite the profit drop, BP is paying a slightly higher dividend – 10.5 cents – than a year earlier (10.25 cents). The company, which will pay out more than $2 billion to its shareholders this quarter, says it will review its dividend policy in the current quarter. Earlier, the Norwegian Equinor was the first to lower its profit distribution. Due to market conditions, the former Statoil decided to cut its dividend by two-thirds.
Shell will present its first quarter figures on Thursday and attention will also be paid to the dividend at this group. Despite declining earnings last year, the major concerns have so far held on to their dividends in order to remain attractive to shareholders. Oil companies are not only confronted with the corona crisis, but for the longer term there is also a call for further sustainability. Dividends radiate confidence for the future, but that comes with a price. Shell paid nearly $16 billion to its shareholders over the past year.
The BP share price remained stable on Tuesday, and the maintained dividend may play a role in this. A large cash position can also inspire confidence. BP announced Tuesday that it has $32 billion in cash. In addition, and shareholders also like to see that, it bought back 776 million dollars in its own shares.