Oil prices rocket to seven year high! What next for Shell and BP?

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Both BP and Shell have seen share prices soar in the last month with both companies seeing an increase of over 10 percent. A large factor in this has been spiralling oil prices with Brent Crude pushing above £64.96 ($88) per barrel this week. Predictions have pointed to higher prices to come with Goldman Sachs suggesting it could break the $100 (£73.42) milestone this year. Some analysts have even suggested prices as high as £110.72 ($150) a barrel in 2023.

Victoria Scholar, Head of Investment at Interactive Investor, suggested if such expectations turn into reality BP and Shell would “enjoy the ride higher, in line with what we have already seen in the first few weeks of the year.”

Danni Hewson, AJ Bell Financial Analyst, said although there was “a great deal of money to be made in the mid-term” there were still “massive headwinds for oil companies to consider.”

She explained: “The long-term outlook for oil companies depends entirely on how they navigate the shift to renewables.

“At the moment companies like BP and Shell still rely on oil and gas for the lions share of their revenues.

“The cash they make from those operations is steadily funding their investment into cleaner, greener technology but there are many investors who fear the switch is simply taking too long.”

While oil companies have enjoyed a recent rally in share prices they still remain well below historic levels with both Shell and BP seeing a major dip in the wake of the pandemic.

Oil stocks also took a slight dip today following news from the US that stockpiles had risen, with the White House hinting it could once again release barrels from reserve to help boost supply.

Ms Hewson commented: “When you look at the share price for these two companies, investor sentiment speaks volumes and both have endured falls of more than 20 percent since this time 5 years ago.”

In its most recent trading update this month Shell announced it would return £4.06bn ($5.5bn) to shareholders via a share buy back, whereby the company purchases its own shares pushing up the value for the remaining holders.

There are also signs high oil prices may be sticking around for a while.

Although geopolitical events such as a recent drone attack in Abu Dhabi have had some bearing on price, one of the biggest underlying drivers has been underproduction by the Organisation of Petroleum Exporting Countries (OPEC).

OPEC cut production during the pandemic due to lower demand but has since pledged to unwind the cuts by ramping up production by 400,000 barrels per day.

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However in recent months it has failed to meet the quota with some of its members falling short due to lack of investment and a backlog of maintenance work since the pandemic.

The sluggish return to output meanwhile has failed to keep pace with global economies re-opening.

Ms Hewson commented: “Whilst it won’t go over well with environmental campaigners, politicians or the public, energy demand post-Covid is rising and for the moment renewables and other forms of alternative power are simply unable to take up the slack.”

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