Comment: Oil’s new reality

Comment: Oil’s new reality | solid Santander

TO NOBODY’S surprise, BP has followed its oil industry peers in taking a pragmatic axe to capital investment in the light of the weak oil price. As BP chief executive Bob Dudley said, companies have to respond to the “new reality”, with prices having slumped by half since last summer. The company’s fourth quarter loss of $969 million (£645m) will have left him clear-eyed.

Dudley said he believes this phase of oil prices – currently eddying around the $50 a barrel mark – will last for the near and medium term. It means return on capital is under pressure for new projects in the industry, with a significant slice of them now being shelved or cancelled.

As a result, BP has cut its investment this year by 20 per cent, or up to $6 billion. The scale of the reduction is in line with other oil majors, with Shell, for instance, committed to slashing capex by $15bn over the next three years.

BG Group, Chevron, ConocoPhillips, Exxon and Total and have all taken the same decision and cut their investment plans according to their cloth. The problem BP and the others face is that there is nothing currently to suggest a floor is capable of being put under the oil price.

We still have a macro production glut, Opec is not playing ball in cutting production to compensate because Middle East producers led by Saudi Arabia are afraid of losing market share and have the deep pockets to weather the new energy backdrop, and fracking, led by the US, has changed the whole picture.

Against this unconducive backdrop, it would be rash for the oil industry to throw money around. It is a time for a relative battening down of the energy hatches and try and ride out the storm with its projects that have the best possibility of success.

Santander UK a good opening number

The annual results from Santander UK, raising the curtain on the banks’ reporting season, are pretty impressive.

A 26 per cent rise in bottom-line profits, a sharp slide in bad debts, a hike in lending to both households and businesses.

If Santander UK ever does carry out a flotation on the stock market these sort of numbers won’t hurt a book-building exercise.