Big Oil’s Shareholder Payouts Under Threat As Prices Drop

After years of high oil prices and tight control of the market, the tide is turning for OPEC+, and Big Oil may be about to crumple under the weight of its own distribution.

The Brent crude benchmark recently fell below $70 for the first time in three years, and this week the International Energy Agency (IEA) announced that they expect prices to keep on falling.

“Given the current weak demand and lots of oil coming from the non-Opec countries, mainly from America and others, we may well see downward pressure on the price,” said Fatih Birol, the head of the EIA.

Oil prices have been soaring since Russia’s invasion of Ukraine spurred sweeping energy sanctions, creating favorable conditions for a tight supply of global crude and considerable market control on the part of OPEC+. But now, “the mood among traders and speculators has turned sharply in recent weeks on fears of weaker growth in China and the US, prompting Opec to delay a plan to start reversing more than 2mn barrels a day of cuts,” the Financial Times reported on Thursday.

According to Birol, the main culprit for the slowdown is the weakening of Chinese oil demand. “In the last 10 years, around 60 per cent of global oil demand growth has come from China. Now the Chinese economy is slowing down,” Birol said. Years of breakneck growth have peaked, and Beijing is now facing a protracted property crisis characterized by legions of unfinished housing, ballooning debts, weak consumption patterns, and blistering unemployment rates at the same time that the country is graduating its biggest cohort of students on record – 11.9 million.

This all poses a big problem for Big Oil. For the past three years, shareholders have been enjoying bumper payouts as oil supermajors went buyout crazy. “Only this quarter, ExxonMobil Corp., Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc plan to repurchase more than $16.5 billion of shares,” Bloomberg reports. “On an annualized basis, that’s equal to $66 billion a year, or about 5.5% of Big Oil’s current combined market value.”

But now, investment banking firm Jefferies Financial Group Inc. is warning that this model is quickly becoming unsustainable as oil prices drop off, and that about half of international oil companies “can’t sustain their distribution” without becoming increasingly indebted. Indeed, the turnaround will prove to be a stress test for many oil companies, which may not survive the downturn unscathed.

It appears that the predominant boom-time OPEC+ strategy – “withholding supplies to juice prices and revenues for its 23 members is sustainable” – may be equally unsustainable. Recent attempts to boost the market by delaying supply increases have had virtually none of OPEC’s desired impact on oil prices, instead coinciding with the Brent benchmark’s current  three-year low. Wall Street is now wondering whether OPEC and its allies will make a complete pivot and reverse output curbs to try to kickstart a market-share war.

India is strongly voicing its opinion that OPEC should do just that. India is the world’s third biggest oil importer and consumer, and wants to lower prices at the pump while also meeting its own climbing demand. And India’s position holds increasing sway in oil markets as China’s presence wanes. “With China already falling behind its forecast trend, other Asian countries will become increasingly indispensable to growth in oil demand,” the IEA says.

However, OPEC remains far more optimistic about oil forecasts than the IEA. While the EIA forecasts that this year’s global oil demand will grow by 903,000 barrels a day, OPEC projects a growth rate of 2.03 million barrels a day this year and 1.74 million barrels a day next year.