For the first time since December 2021, the global oil market is facing turbulence as Brent crude prices have dropped below $70 per barrel. This drop has been driven by a combination of factors, including sluggish demand, slowing economic growth, and the increasing adoption of EVs. For upstream oil majors, this is bad news, and the effect has been felt immediately on the share market investment front.
On September 11, shares of major upstream oil companies—Oil and Natural Gas Corporation (ONGC), Oil India, and Hindustan Oil Exploration Company—plunged by up to 5% in opening trade. The cause? The global standard for oil prices, Brent crude, dropped to its lowest point in almost three years. This dramatic decline has sent shockwaves across energy stocks, shaking investor confidence in the sector.
What’s driving the fall?
Brent crude prices tumbled as concerns about weak demand and moderating economic growth took centre stage. Additionally, the rise of electric vehicles has begun to impact the oil market. EV adoption continues to surge globally, particularly in major economies like China, where their increasing market share is reducing demand for fossil fuels. The Organisation of the Petroleum Exporting Countries (OPEC) has also played a role in stoking these worries, as it recently cut its global oil demand forecast for the second time in two months. The group now expects demand to grow by 2 million barrels per day (bpd) in 2024, 80,000 bpd lower than previous projections.
OPEC’s revised forecast comes on the back of weaker-than-expected consumption in China, the world’s largest importer of crude oil. With the Chinese economy struggling and EV sales surging, the outlook for oil demand in the world’s second-largest economy has become increasingly uncertain. These factors have created a perfect storm, sending crude prices tumbling.
Impact on share market investment in oil companies
For investors focused on share market investment in the energy sector, the drop in oil prices poses a significant risk to upstream oil companies. Lower crude prices directly impact the revenues and profit margins of oil producers, as their extraction costs remain relatively fixed. With crude prices falling, these companies face the prospect of lower earnings and reduced shareholder returns.
In response to this outlook, brokerages have begun to lower their price forecasts for crude oil. Morgan Stanley, for example, reduced its Brent forecast from $80 to $75 per barrel, while Bank of America cut its second-half 2024 projection to $75 from the earlier $90. Similarly, Goldman Sachs and UBS have also revised their targets downward, further dampening the market sentiment for oil investments.
The pressure on share prices was immediately visible, with Oil India seeing the steepest fall, down nearly 5%. Hindustan Oil Exploration Company followed close behind, falling by almost 4%, while ONGC shares slipped by about 2%. As oil prices remain volatile, upstream oil companies will likely continue to face headwinds, affecting their stock market performance.
Key takeaways
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