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Commodity Analysis
BP Plc may look to sell its roughly 20% stake in Rosneft PJSC back to the explorer at a huge discount after the invasion of Ukraine forced the oil major to make a rapid exit from the country. Shell Plc is also ending its investment in the Sakhalin-2 LNG project, which dates to the Yeltsin era. The decisions of these two companies put pressure on remaining foreign investors, such as Exxon Mobil Corp. and TotalEnergies SE, to follow suit, as Russia’s war in Ukraine disrupts global economic activity.
BP doesn’t see many other ways of offloading their stake in Rosneft as sanctions will make it difficult down the line to sell the oil, and they’re preparing to take a hit of as much as $25 billion because of quitting Russia now, rather than potentially a larger hit later. There have been no firm decisions made by BP regarding the stake sale yet.
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BP’s share price is currently at 357.60p and a close below 360.00p would signal a break in market structure and further downside potential. A further 10% drop towards 330p would be the next likely target. Today the trading in BP shares has hit over 19million with only a -1.40% drop. Shell is also down around 1.40% but on less than a quarter of the volume traded.
Shell Plc announced it will end partnerships with state-owned Gazprom PJSC, including the Sakhalin-2 liquefied natural gas facility and its involvement in the Nord Stream 2 pipeline project. It estimates both projects to be worth $3 billion. Shell’s share price has also recently taken a hit but at 1955p there is still a way to go before a significant low is taken. 1800p looks like a good area to look for a new trade as there is also a gap from late January which would likely get filled before any further moves.
The Swiss company that constructed the Nord Stream 2 gas pipeline from Russia to Germany is considering filing for insolvency as it tries to restructure after being sanctioned by the US.
Exiting Russia will have a profound effect on both sides. BP and Shell will write down billions of dollars in the value of their investments, while Russian state energy companies will lose partners who brought capital and expertise to the table. Europe also stands to lose a major energy contributor, though there are still flows through Ukraine at the time of writing.
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The FTSE holds both BP Plc and Shell Plc, and recent price action shows the daily 200-period moving average once again acting as a decent dynamic support. A close below 7227 would signal a deeper correction is likely as that would be a break of significant market structure.
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As oil prices continue to rise both BP Plc and Shell Plc will both remain attractive propositions but with potential multi-billion losses coming, shareholders may decide to get out whilst the prices are relatively high.
The oil futures contract shows that current prices are at a previous target level, but should we close higher than $107.68 the next stop is likely to be in the +$120 range. The Commitment of Traders report showed that oil producers were still not adding to their hedges, so whilst this is the case, we must assume that oil is going higher for longer. OPEC+ will feel they can keep adding 400k bpd with prices stabilising at these higher prices, so it will take a demand shock or a massive injection of supply, starting with Iran to get prices lower, whilst the Russia/Ukraine situation continues.
