BP shares slide on potential $17.5 billion hit due to lower oil prices

The oil and gas major saw its share price take a tumble on Monday after the company warned that it faces a multi-billion write-off in expectation of average oil prices remaining low for some time.

BP shares closed 2% lower on Monday after warning investors that it will book pre-tax write-offs on oil assets and exploration of between $16 billion – $21 billion in its second quarter (Q2) results.

The news comes after the oil and gas major lowered its oil price forecasts by around 30%, with the company expecting Brent crude to average $55 a barrel from now until 2050.

Brent crude is trading marginally lower at $38.69 a barrel at the time of publication, while the US West Texas Intermediate (WTI) is down 44 cents to $35.82 a barrel.

BP adjusts to ‘lower carbon economy’

Oil prices are expected to remain low, not only because of weakening demand as a result of the Covid-19 outbreak, but governments ramping up plans to cut carbon emissions in the wake of the pandemic, BP said in a statement.

‘In February we set out to become a net zero company by 2050 or sooner,’ BP CEO Bernard Looney said. ‘Since then we have been in action, developing our strategy to become a more diversified, resilient and lower carbon company.’

‘As part of that process, we have been reviewing our price assumptions over a longer horizon,’ Looney said. ‘That work has been informed by the Covid-19 pandemic, which increasingly looks as if it will have an enduring economic impact.’

‘We have reset our price outlook to reflect that impact and the likelihood of greater efforts to 'build back better' towards a Paris-consistent world,’ he added. ‘We are also reviewing our development plans.’

‘All that will result in a significant charge in our upcoming results, but I am confident that these difficult decisions - rooted in our net zero ambition and reaffirmed by the pandemic - will better enable us to compete through the energy transition,’ Looney said.

WTI edges lower

WTI continues to suffer from the general risk-off atmosphere, falling to a two-week low, according to Chris Beauchamp, chief market analyst at IG.

‘A small bounce on Friday hit resistance, maintaining the short-term bearish trend, with further downside targets at $31.50,’ he said. ‘A move above $36.40 helps to revive a more bullish view.’

Barclays ups oil price forecast

Despite disappointing global economic forecasts, weak demand and concerns about oversupply, analysts at Barclays raised their 2020 oil price forecast for Brent crude by $4 to $41 a barrel and believe that WTI will trade at an average of $37 this year.

However, analysts at the UK-based bank admitted that prices could fall over the near-term, with the stability of the market highly dependent on consumer behaviours.

Barclays also admitted that renewed fears over a second-wave of coronavirus cases emerging as the world begins to emerge from government-imposed lockdowns will keep prices subdued in the coming months.

‘As we mark to market our [second quarter] estimates and account for a potentially larger [second half] deficit, we raise our 2020 oil price forecasts by $4/b but remain cautious with respect to the curve over the near term,’ Amarpreet Singh, vice president of oil strategy at Barclays, said in a research note on Thursday.

How much does it cost to buy UK shares with IG?

There are three ways to ‘buy’ UK shares with IG: spread betting, trading CFDs or buying physical shares. The cost will depend on which method you choose. The table below illustrates how the costs to get exposure to £10,000 of Lloyds stock, which is equivalent to 16,000 shares (quoted at 62.5p a share).

Remember, spread bets and CFDs are derivatives, which come with higher risk and reward than investing.

Cost to get exposure to Lloyds stock

Spread betting CFD trading Share dealing
Action Buy £160 per point Buy 16,000 share CFDs Buy 16,000 shares
Capital required to open £2000 £2000 £10,000
Total fees £20.88 £20.88 £16

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