Oil stocks went back in vogue two years ago with a vengeance as investors sought to get a piece of the record profits the industry reaped from the gas squeeze in Europe and the oil squeeze fears prompted by sanctions on Russia.
Two years on, and that appeal is dissipating, at least according to some banks, as oversupply in oil looms over the market, and demand growth remains below optimistic expectations. In fact, one bank believes European Big Oil is maxed out.
Last month, Morgan Stanley cut its price target for crude oil, citing rising supply and dwindling demand growth. The bank also cut its share price targets for the European Big Oil majors without exception. TotalEnergies, Shell, BP, Equinor, and Repsol were all revised down, with Eni alone being spared by the bank’s forecasters.
Those forecasters had a sound basis for their revisions: none of the factors that usually drive energy company stocks higher were present at the moment. Among these factors, as reported by the Financial Times, were expectations of higher inflation, higher interest rates, rising oil prices, and a subdued overall stock market.
“Going through the checklist, we find that none of these are in place at the moment. In fact, most of these factors are pointing in the opposite direction,” Morgan Stanley analysts wrote in a note predicting the immediate future of European supermajors.
Interestingly, Morgan Stanley lists higher interest rates as conducive to higher energy stock prices, when those are in opposition to another factor for higher stock prices, namely rising oil prices. When interest rates are high, oil prices tend to get pressured, and vice versa. But another factor that Morgan Stanley cited as a reason for pessimism about the energy sector was the discrepancy between oil demand and oil supply.
The bank said in an earlier report that the oil market would swing into oversupply in 2025 amid higher production from both OPEC+ and other producers, namely the United States and Brazil. Morgan Stanley, by the way, is not the only bank predicting a surplus. Goldman Sachs also recently forecasted a surplus situation, citing high global inventories, weak Chinese demand, and growing U.S. production.
If all these developments are indeed in progress, it’s bad news for the European supermajors. They just recently revised their strategies, reprioritizing their core business over experiments with so-called ESG investing over the past few years as they sought to get a piece of the transition action and suffered losses from it.
Yet here is the thing: the factors Morgan Stanley lists as precursors to a stock rout in oil and gas are not a fact. They are suggestions and possibilities. And they might never materialize.
Let’s take Morgan’s expectation for a surplus oil market in 2025. The specific numbers are demand growth of 1.2 million barrels daily and supply growth of 2.6 million barrels daily, both from OPEC and non-OPEC producers. Like others, Morgan Stanley assumes that U.S. output would keep growing at previous rates and that OPEC will begin rolling back its cuts at whatever price point Brent crude is trading. These are some substantial assumptions, especially in light of OPEC’s insistence it would only begin rolling back the cuts when market conditions are right. Brent below $80 does not seem to fit OPEC’s perception of the right market conditions.
Leaving the OPEC cuts aside, however, what about production? U.S. drillers have been serving surprise after surprise, reporting higher than expected output on drilling efficiencies, posting an unexpected output growth rate of about 1 million bpd for last year despite a lower rig count. Yet the assumption that this would continue regardless of where oil prices are going would be a bold one. Because in addition to drilling efficiencies, U.S. oil producers have been focusing on ensuring a certain level of shareholder returns at the expense of drilling just for the fun of it.
Then there is demand. All price forecasts, whether Brent crude or Shell’s stock, rely heavily on Chinese demand data and forecasts. The data suggests that the oil demand in the world’s largest importer of the commodity is losing steam after two decades of strong growth. This naturally weighs on prices—and on supply.
Reuters’ John Kemp reported last month that OECD oil inventories were 120 million barrels or 4% below the ten-year average at the end of June this year. This was up from a deficit of 74 million barrels at the end of March. In other words, the world, or at least the OECD part of it, was dipping into inventories to satisfy its oil demand. Those are very far from the surplus Morgan Stanley predicted for next year. Incidentally, OPEC+ is in no rush to roll back production cuts.
European supermajors have seen their stocks underperform their U.S. peers. However, the consensus on the reasons for that has had nothing to do with oil demand and supply. It has had to do with the much tighter regulation in Europe and the obligation to invest in non-core activities in the alternative energy segment of the industry. Those investments have not turned out well—despite upbeat analyst forecasts that this was the way forward and the supermajors were doing the right thing. Big Oil’s bets on its core business, on the other hand, have generally paid off, regardless of bank predictions.
HALIFAX – Ottawa is negotiating a $500-million bailout for Nova Scotia’s privately owned electric utility, saying the money will be used to prevent a big spike in electricity rates.
Federal Natural Resources Minister Jonathan Wilkinson made the announcement today in Halifax, saying Nova Scotia Power Inc. needs the money to cover higher costs resulting from the delayed delivery of electricity from the Muskrat Falls hydroelectric plant in Labrador.
Wilkinson says that without the money, the subsidiary of Emera Inc. would have had to increase rates by 19 per cent over “the short term.”
Nova Scotia Power CEO Peter Gregg says the deal, once approved by the province’s energy regulator, will keep rate increases limited “to be around the rate of inflation,” as costs are spread over a number of years.
The utility helped pay for construction of an underwater transmission link between Newfoundland and Nova Scotia, but the Muskrat Falls project has not been consistent in delivering electricity over the past five years.
Those delays forced Nova Scotia Power to spend more on generating its own electricity.
This report by The Canadian Press was first published Sept. 16, 2024.
TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
