On Tuesday (28 April), the United Arab Emirates (UAE) announced it will be leaving the Opec group of major oil producers.
The move ends nearly 60 years of membership, and was described by one analyst as “the beginning of the end of Opec“. The UAE is the third-largest producer in the group of 12 countries and will exit the group on 1 May.
So what does it mean for British energy shares — and should investors be concerned?
Volatility, as usual
The UAE’s exit may be bad news for Opec, but it’s not an immediate disaster for British energy investors. For FTSE energy shares such as BP (LSE: BP) and Shell (LSE: SHEL), the key issue is still the oil price.
A weaker Opec will probably lead to supply problems, which ultimately means volatility and higher crude oil prices. That’s not an ideal situation (as everything gets more expensive), but it can mean more cash flows for oil producers while prices stay high.
Essentionally, for energy stock investors, the gains could offset higher expenses elsewhere.
Should UK investors do anything?
BP and Shell tend to benefit when crude prices rise, with Reuters recently highlighting that BP’s results are particularly sensitive to oil-price volatility. Shell’s profits similarly move with weaker or stronger oil and gas prices but to a lesser extent.
That means the UAE’s departure could be mildly positive for earnings if it helps keep oil elevated. But it could also raise the risk of sharper price swings that make forecasts less reliable.
For UK investors, this is more a market structure story than a direct company-specific shock. BP and Shell are both diversified global businesses, with shares are driven by a number of factors aside from Opec membership, including:
- Oil prices.
- Gas prices.
- Trading performance.
- Share buybacks.
- Capital returns.
In the greater scheme of things, this isn’t a huge development. UK energy shares have already suffered volatility from this year, rising when crude jumps and weakening when higher oil prices drive inflation worries.
So what’s the likely impact?
In the near term, the UAE leaving Opec could be:
- Positive for BP and Shell if traders price in tighter supply and higher crude prices.
- Negative for consumer-facing parts of the FTSE if higher energy costs feed inflation and pressure sentiment.
- Neutral overall if the market decides the move simply adds volatility without changing actual supply that much.
In reality, the foundational picture remains the same, with the key risk being disruption at the Strait of Hormuz. To that end, performance will depend on how each individual company meets the challenge.
BP has already boasted about exceptional trading conditions, while Shell has kept buybacks and is still shaping its portfolio through deals.
The key takeaway?
Overall, I don’t see any reasons for investors to be too concerned. The UAE’s exit probably makes the oil market more unpredictable, and that can cut both ways for UK energy shares.
It may lift earnings while prices are strong, but it also increases volatility risk and valuation noise. So for long-term investors, I’d say it’s sensible to focus on balance sheet strength, dividend cover, buybacks and oil-price sensitivity.
The Opec story might make for sensational headlines but it’s certainly no reason to panic.
The post How should FTSE 100 energy investors react to the UAE quitting Opec? appeared first on The Motley Fool UK.
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Mark Hartley has positions in Bp P.l.c. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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