7.9 Reasons To Sell BP plc And Royal Dutch Shell Plc

Royston Wild explains why fresh demand data should deter investors from filling up on BP plc (LON: BP) and Royal Dutch Shell Plc (LON: RDSB)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I remain convinced that fears over a worsening supply/demand balance in the oil market will keep investor enthusiasm for fossil-fuel leviathans BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) under pressure for some time to come.

My sentiment was given fresh fuel during the weekend by shocking Chinese trade data that showed imports of oil volumes slump 7.9% during January, once again underlining the extent of flailing domestic industrial activity. This latest report comes as a major worry as China is responsible for around a third of worldwide oil demand, second only to the United States.

And the scale of the slowdown on the world’s factory floor was highlighted further by reports that total Chinese imports slumped an eye-watering 19.9% last month, the biggest decline for almost six years.

The steady stream of poor economic releases from China shows no signs of easing, and this weekend’s poor trade data follows disappointing official manufacturing PMI numbers which showed output in January slip into contraction for the first time since the summer of 2012.

Dire demand undermines profit prospects

Not surprisingly industry analysts are marking down their forecasts for Chinese energy demand in the near term and beyond, and markets becoming increasingly concerned that recent stimulus measures introduced by the People’s Bank of China are failing to stoke domestic consumption and underpin confidence in the country’s growth prospects.

The International Energy Agency (IEA) has already said that it expects demand from Beijing to clock in at 2.5% this year, down 20 basis points from 2014 levels. But as lawmakers struggle to rebalance the economy from an investment-geared one to a model driven by consumers, and financial conditions in critical European end-markets continue to deteriorate, even these forecasts could be deemed optimistic.

In response to a worsening demand outlook, both BP and Shell are aggressively battening down the hatches as profits plunge. Last week BP announced it was scaling back capital expenditure this year to $20bn, down from its previous guidance of between $24bn and $25bn. This follows news that its competitor would slash outlay by $15bn over the next three years.

Undoubtedly signs that US shale producers are cutting back on production is a step in the right direction to addressing the glut of supply in the oil market. But with industry cartel OPEC vowing to keep pumping even if prices fall as low as $20 per barrel, and stuttering global activity heaping further pressure on the market balance, I believe that BP and Shell can expect much more trouble at the bottom line.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »