Having analysed stocks for a long time, I’m not unfamiliar with the expansive and sometimes obscure nature of cause and effect when it comes to investing. We all know that when a butterfly flaps its wings in Japan, in Silicon Valley a wind-power start-up sees its share price rise. But even so I have to admit it took me a second glance recently when I saw that BP (LSE: BP) was warning that the coronavirus could be set to hurt its profits.
Oil demand
This comes about, of course, because of the impact the virus will be having on global oil demand, and particularly that of the massive oil-consuming powerhouse that is China. Earlier this month, the International Energy Agency (IEA) warned that crude and gas demand is expected to grow at its slowest rate since 2011 because the coronavirus outbreak is hitting Chinese consumption.
In China, transport has been severely hit by official government quarantines, as well as the natural fall in demand for travel when outbreaks like this occur. This has also had a knock-on effect on Chinese industry itself, another major consumer of oil and oil derivatives.
In times of plenty, perhaps the crude price wouldn’t see too much trouble from this kind of tragedy, but unfortunately for oil companies, the price of crude had already been suffering under pressures from oversupply. The concerns of the coronavirus may simply be the last straw that sends the price of crude to levels where oil producers struggle.
But I believe that large oil companies such as BP are able to weather such oil-price storms. Revenues and profits may take a hit, but as a medium-to-long term investment, a bad year for the oil price usually isn’t of too much concern.
The influence of OPEC is also something worth considering. As a group, OPEC tends not to be the subtlest in its reaction to low oil prices. I wouldn’t be surprised that with this added coronavirus factor hitting prices, its members will seen be cutting supply quotas very soon.
The green move
But if I think short-term issues shouldn’t worry investors, what about the long-term ones? A more fundamental concern for oil companies is, of course, the move away from crude products and into renewable energy. This is all taking place against a backdrop that means environmental concerns about carbon emissions make firms like BP the bad guys in many people’s eyes.
But BP is acutely aware of this and is taking action. It’s no surprise that this month has seen it announce its intention to become carbon-neutral by 2050. This is apparently the most ambitious of such targets made by any mega-sized oil firm, though I suspect from an environmentalist’s perspective, it will do little to change public opinion of oil producers.
Interestingly however, such pressures on oil firms are coming from investors themselves, both institutional and retail. The winds do seem to be changing, and though only a fool would argue we currently don’t live in a world that needs oil, the fact that the biggest players in the market are making efforts in the renewable space could be future-proofing them.
As an investor, I’m not worried.
