(Bloomberg) -- European oil shares fell after Norway’s sovereign wealth fund proposed selling about $35 billion in oil and gas stocks to protect the nation against a potential drop in the price of crude. At the lowest point of declines, the news wiped about 5 billion dollars in market capitalization off stocks in the Stoxx Europe 600 Oil & Gas Index, according to Bloomberg calculations.
Statoil ASA retreated as much as 0.9 percent, Royal Dutch Shell Plc fell as much as 1.2 percent in London and BP Plc dropped as much as 0.9 percent before paring declines. The Finance Ministry said it would study the plan and decide at the earliest in “autumn 2018.” Here’s what analysts had to say about the plan:
Santander analyst Jason Kenney, by email:
- Seems a thematic thing -- with a few funds moving to downsize exposure to hydrocarbon companies and fossil fuels -- and extractive industries also. We see this as further reason to be cautious for oils relative to broader markets over coming one to three years, adding to likely moderated oil prices.
MPPM EK head of trading Guillermo Hernandez Sampere, by email:
- I don’t see this as a common sell signal as the global economy is still in a healthy shape and there are still some “landmines,” such as Venezuela, Middle East tensions etc. and the Aramco IPO next year, which might urge on volatility and stimulate the oil price.
- There are signs to believe in an extension of production cuts in the future, so the optimism for short-term orientated investors is understandable.
- Mid- and long-term disappointment is possible due to IEA estimates that oil supplies may not be reduced in 2018, even overcapacity might be possible. The OPEC might not meet their target to reduce all capacities when U.S. production maintains these levels. That could weigh on the oil price.
- Norwegian wealth fund is mainly known as a long-term investor, so they might see clouds on the horizon.
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Wisconsin, by email:
- Instead of blindly indexing against the broad market, it only makes sense to take account the investor’s individualized risks. Norway’s wealth is built on oil, so it only makes sense to reduce their exposure to oil prices.
- Contributions to the fund increase with wealth, so why double down on a bet on rising oil prices? Arguably, they would prefer exposure to lithium and things tied to new energy sources that are substitutes for oil. Sovereign wealth funds in oil-dependent economies should -- and do -- look at these macro risks.
Pareto Securities analyst Trond Omdal, by phone:
- It makes sense for Norway to look at their exposure to oil and gas assets, given the uncertainty about the future of the sector. However, it would take months or even years to execute this decision, if it’s approved.
- We’re seeing a short-term negative market reaction but the proposal hasn’t been approved yet.
Scotia Howard Weil analyst Blake Fernandez, in a note:
- Evidently this is not a call on future commodity prices, but an attempt to diversify the country away from oil and gas exposure, where it is inherently long given domestic production and through its ownership stake in Statoil.
- There could be negative implications for international oil companies from a funds flow perspective. The European oils are probably most exposed, with the U.S. supermajors slightly behind.
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