13 Jun 2018
Geopolitical factors have played a crucial role in boosting energy markets of late. Iran is currently dominating headlines, given the US’s decision to pull out of the agreement that lifted economic sanctions in return for the curbing of Iranian nuclear activity. The possible return of US sanctions against the country could remove as much as 400,000-500,000** barrels per day from Iranian supply, which could have a material effect on the overall dynamic of the market. Meanwhile, declines in production from OPEC (Organisation of the Petroleum Exporting Countries) member Venezuela have added further upward pressure to prices as the country continues to deal with its economic crisis.
Leaving aside the geopolitics though, the underlying supply and demand dynamic in the oil market was already conducive to a rising price environment. Demand from both developed and emerging markets remains buoyant, with the International Energy Agency (IEA) warning of a possible deficit as demand begins to outstrip supply this year.
On the supply side, the effects of the decision by oil majors to cut capex following the market correction in 2015 are now being strongly felt. Chronic under investment in large-scale projects and a greater emphasis on shareholder returns are oft-overlooked factors supporting the recent rise in the oil price. Finally, production curbs by OPEC and other major oil producers since the start of 2017 have successfully removed some capacity from a market that had been suffering from a glut in supply.
Has this rally been translating into higher profitability at the corporate level though? Both of the UK-listed oil majors, BP and Royal Dutch Shell, have been beneficiaries of the rising oil price, but at the company level their discipline and commitment to delivering value to shareholders should also be acknowledged.
With the Deepwater Horizon spill now behind them, BP has disposed of non-core assets and rebuilt its balance sheet to the extent that at the end of 2017 it was able to engage in a series of share buybacks. Most crucially the company remains committed to a disciplined approach to capital expenditure and to returning cash to shareholders through dividends. Royal Dutch Shell, too, has learned its lessons from the market correction in 2015, trimming its upstream operations and offloading non-core assets in favour of delivering an attractive dividend to shareholders.
Following a period of restructuring and disposals, both BP and Shell now have a particularly benign scenario facing them, with robust demand and tighter supply supporting a higher oil price. This should serve UK equity income investors well, with both companies continuing to offer attractive dividends.
*Brent crude. Source: Bloomberg; data as of 16 May 2018.
** Sourced from Oilprice.com as at 7 May 2018.
Amit Parmar is a Client Portfolio Manager within the J.P. Morgan Asset Management UK equity team.
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority.