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Learn To Love Big Oil

Learn To Love Big Oil

Lionel Laurent07.03.08, 3:50 PM ET


Big Oil shares closed lower in Europe on Thursday, another sign that sentiment in the sector is turning despite record crude prices. But industry-watchers believe this is no time to bail out of the sector.

Royal Dutch Shell (nyse: RDSA – news people )’s A-class shares slipped 0.2%, to 19.88 pounds ($39.41), in London on Thursday, even as crude oil hovered at $145 per barrel. Shares in BP (nyse: BP –news – people ) fell 0.3%, while France’sTotal (nyse: TOT – news – people ) lost 1.4%, to 51.53 euros ($80.88), in Paris.

Supply disruptions in uncertain countries like Russia and Nigeria are weighing on integrated oil stocks, along with the fear that energy inflation will hurt demand. But there is every chance the oil majors will get a boost as more projects come on-stream and production perks up. 

“You really would want to stay invested in this,” said Peter Hutton, analyst with NCB Stockbrokers. He picked Royal Dutch Shell as the best way of staying on top of record oil prices, thanks to its exploration and production activities, even as costs soar and refining margins get crimped. 

Shell, BP and Total shares have all fallen 7.2% to 8.6% over the past month, despite the upward direction for oil prices in the same period. BP’s troubles with its Russian joint venture TNK-BP and militant attacks on Shell sites in Nigeria have stoked supply fears, while higher prices at the pump suggest that overall demand could decline. 

“There is a risk of demand destruction,” said Alexandre Weinberg, analyst with Petercam. “Consumption has already slipped in Germany and Japan.” 

But Weinberg told that Shell in particular was well-positioned in the current environment, having invested heavily over the past four years in expanding production. He said energy projects in Russia, Mexico and Qatar had proven key to Shell’s expansion, and that he expected a strong set of second-quarter results at the end of July. 

Shell and BP posted unexpectedly strong first-quarter profits this year, thanks to sharp cost-cutting and a good cash position. (See “The Time Is Right To Buy Big Oil”)

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