Rising price of oil, and investment of oil majors

Short comment

Despite the recent rising oil price, oil majors are reluctant to increase investment. Rather, it seems to be tightening, by increasing efficiency of operation, reducing cost and increasing shareholder-return. Simply, there are three reasons.

1. Uncertainty about supply and demand

Crude oil prices are currently experiencing significant volatility. US crude oil futures rose to $76 with concerns over supply shortages stemmed from a lack of supply facilities and American sanctions against Iran. But the price has fallen below $70 again, with two factors. Firstly, several international think-tanks are suggesting that there would be huge decrease in demands for oil during next-year with sluggish real economy. Secondly, the sanctions couldn't prevent some countries from importing Iranian oil. Some analysts still claim that WTI or Brent could touch $100 in next year. But I still suggest that $60- $ 75 is a appropriate band for it. Anyway, due to the instability between demand and supply, they are reluctant to increase investment except Exxon Mobil.

2. Instability of the real economy itself

Some analysts suggest that economic growth of the US, which has been leading the global economic growth, will be hard-landing with rising US Treasury yields as early as next year. In fact, this is why all sectors, not just the energy sector, could be conservative about investment.

3. Movement of transition to eco-friendly energy

It is a movement that appears mainly in Developed Markets such as US, Europe, and Japan. Recently US President Donald Trump is weakening the movement in the US by eliminating various environmental regulations. In Europe, however, there is a unified tendency for the governments to be more environment-friendly. Financial institutions including central bank like Bank of England are putting pressure on investments in fossil fuel projects. The impact is reaching pension funds such as the Norwegian pension funds. While Emerging Markets, which are led by China, are growing, DM are still major customers of oil. However, oil demands from EM are expected to remain strong. EM does not pay much attention to eco-friendly yet. A representative example for it is the price of coal. Recently, coal prices have skyrocketed despite declines of thermal power generation in DM, as EM have increased the power generation.

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Exxon Mobil is increasing investment, while Royal Dutch Shell is tightening. How will the stock prices of the two companies move?