By Stephanie Yang and Alison Sider
Oil prices are approaching $60 and major energy companies are
signaling fresh optimism that they can hold the recent gains, a
dramatic reversal from a few months ago when prices were
languishing.
West Texas Intermediate prices have surged more than 36% from a
June low to a two-year high. The $60-a-barrel milestone would mark
a shift in sentiment from earlier this year, when prices were in a
bear market despite efforts by global producers to limit output.
The rebound prompted analysts to boost their price forecasts last
month for the first time in six months.
U.S. crude prices are still down nearly 46% from their 2014
high, and fell for a second consecutive day Tuesday, slipping by
0.2% to $57.99 a barrel.
In another sign prices are expected to stabilize, major oil
companies are looking to reward shareholders after years of belt
tightening.
Royal Dutch Shell PLC said Tuesday it would begin paying its
dividend only in cash, scrapping a program that gave shareholders
the option of receiving dividends in discounted stock, known as a
scrip. Shell also said it is committed to launching a $25 billion
share-buyback program soon. Shell shares rose 3.7% in London
Tuesday.
Last month, Norway's Statoil ASA said it also intended to do
away with its scrip dividend program. BP PLC said last month it is
restarting a share-buyback program, and its board has discussed
removing its own scrip program.
Unlike previous years, when oil often dragged down other
financial markets, resurgent global economic growth is pushing U.S.
stock markets to record highs and lifting oil prices.
"The broader global economic picture has been one that continues
to strengthen," said Michael Cohen, head of energy commodities
research at Barclays. "There are only a very small number of
countries that are not showing positive global growth."
Nearly half of the 35 major equity indexes representing the
world's biggest stock markets by value have reached multiyear highs
this year. Also, strong factory activity in China has boosted
copper -- a widely watched barometer of global economic health --
to near a three-year high.
Profits at many of the world's largest energy companies soared
during the third quarter, and the higher prices have given many
U.S. companies confidence that they can continue to increase
earnings. The energy sector of the S&P 500 hit a 2017 low in
August, and has since climbed 9.8%.
Traders say a break above $60 isn't guaranteed. Uncertainty
about whether the Organization of the Petroleum Exporting Countries
will agree to continue holding crude off the market when the group
meets Thursday has weighed on prices recently.
But the International Energy Agency expects oil demand to have
increased by 1.5 million barrels a day this year and to rise by 1.3
million barrels a day in 2018.
Some analysts are even more optimistic. Goldman Sachs Group Inc.
said in a research note earlier this month that rising consumption,
especially in India and China, prompted the bank to boost its
forecast for global oil demand -- Goldman analysts now expect it
will increase by 1.7 million barrels a day this year from 2016.
"We are more optimistic on oil demand growth given the ongoing
solid global growth momentum and the still relatively low oil
prices," they wrote in a note Monday, reiterating their
forecast.
Demand was a question mark heading into this year. Low prices in
2015 and 2016 fueled "scorching" increases in consumption and some
weren't sure whether that would continue, said Doug Terreson, head
of energy research at Evercore ISI.
"But with oil prices low and the global economy strengthening,
we had another great demand year," he said.
Increased demand has pulled stockpiles of crude oil out of
storage this year, even as U.S. shale producers have ramped up
output and pushed weekly production to record highs. Last month,
crude stockpiles fell to the lowest level since the beginning of
2016, according to the U.S. Energy Information Administration.
"So far it has been surprising to many players in the
marketplace how quickly inventories in the United States have
adjusted," said Bart Melek, head of commodity strategy at TD
Securities.
Global stockpiles have also steadily declined this year,
according to data tracked by the IEA. In recent months, increased
geopolitical tensions in countries such as Saudi Arabia and Iraq
sent oil prices higher, which analysts noted as a sign of a tighter
market supply.
Still, the specter of higher U.S. production continues to worry
some investors. Jack Ablin, chief investment officer at BMO Private
Bank, said restraint by OPEC -- especially Saudi Arabia --
underpinned oil's turnaround this year. But $60 a barrel is likely
the upper bound for U.S. crude prices, he said.
"At $60 we would start to see the rig count really ramp up," Mr.
Ablin said. "I have a feeling that what Saudi Arabia wants more
than high prices would be stable prices."
Oil's recent rally may also be threatened by a meeting this week
between OPEC and other global producers including Russia. On
Thursday, the group is expected to decide whether or not to extend
a deal struck last year to curb production, as part of their
efforts to reduce an overhang in crude supply and bring stockpiles
back to the average level of the past five years.
While most traders are anticipating an extension to the deal,
which is set to expire in March 2018, many said the market is
vulnerable to a reversal if the announcement disappoints
investors.
Net long positions held by speculative investors recently
reached an all-time high in the global Brent market, according to
data from Intercontinental Exchange. Net bullish bets on U.S. oil
futures also hovered near record highs ahead of the Thursday
meeting.
While investors have become more optimistic about the
possibility of supply cuts, global demand was the surprise factor
that pushed oil prices higher than expected, said Darwei Kung,
portfolio manager of the $2.7 billion Deutsche Enhanced Commodity
Strategy Fund.
"It's outside of the boundaries that we had anticipated earlier
this year," said Mr. Kung, whose firm raised U.S. oil forecasts
last week to $58 a barrel over the next 12 months. "Demand was
stronger than we expected."
--Michael Amon contributed to this article.
Write to Stephanie Yang at stephanie.yang@wsj.com and Alison
Sider at alison.sider@wsj.com
(END) Dow Jones Newswires
November 28, 2017 19:12 ET (00:12 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
BP (NYSE:BP)
Historical Stock Chart
From Aug 2024 to Sep 2024
BP (NYSE:BP)
Historical Stock Chart
From Sep 2023 to Sep 2024