European energy sector in worst quarter since 2015

Drop in crude prices sparks jitters among equities investors

By Federica Cocco

European energy stocks are on track for the worst quarter since 2015 as equity investors retreat from a sector dragged down by declining oil prices.

The MSCI European Energy index, comprised of European resources companies including BP and Eni, is down 8.5 per cent on the quarter. This is the worst performance since 2015. In comparison, the broader MSCI Europe benchmark has declined by a softer 4.6 per cent.

Image result for North Sea oil, photos

Both indices are measured in euro terms. The price of Brent crude, the international oil benchmark, peaked on October 3 at $86.29 per barrel and has since fallen by 20 per cent to a seven-month low. Some of this has happened on the back of an increase in global supply. Just in the last week the Trump administration said it would exempt a number of countries from US sanctions on importing Iranian oil, allowing the country’s biggest customers to continue buying its crude for another six months.

Within the European energy sector sub-index, only two out of 17 stocks showed gains.

Nordic companies such as Norway’s Aker and Sweden’s Lundin lost around a quarter of their market value, while energy majors like Royal Dutch Shell, Total and BP lost more than 10 per cent in the last six weeks. “The last time investor sentiment in oil was so low oil prices were on their knees at $30 a barrel, two and a half years ago,” said Michael Tran, global energy strategist at RBC Capital Markets.

Unlike then, Mr Tran said, the physical market is not oversupplied as “from a physical barrel basis, it’s really not that bad out there and it certainly does not warrant a 15-20 per cent pullback like what we’ve seen for the past three-four weeks.”

Rather “the financial market is trading off of news” and “pricing in a significant amount of fear after the Iran [sanctions] waivers, and the idea that Russia, Saudi [Arabia] and the US are producing at record levels, as well as broader emerging market macro-fears, ie the idea that China and India are slowing, and implications for demand there.”

A potential turning point will be the meeting in Abu Dhabi of Opec’s Joint Ministerial Monitoring Committee, which may give an indication of whether Opec will announce a cut in production at its next meeting in early December.

“This may generate headlines early next week that could potentially turn the tide” said Mr Tran.


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