Oil volatility and the dividend bonanza: What's the score?


Crude oil has been something of a focal point over the past few months.

Back in the middle of 2021, when the astute analysts at Goldman Sachs looked at the economic and geopolitical situation globally and saw that restricted supply chains and a reopening American industry base alongside a never-stopped Chinese and Indian commercial powerhouse would possibly lead to a rise in value, the prediction was that crude oil would reach $80 per barrel.

That seemed outlandish at the time, but they were indeed correct, and in fact crude oil reached well over $100 per barrel during the course of 2022.

Now, with crude oil values back down and having lost most of its gains since the Western world's sanctions on one of the largest oil producing nations on earth - Russia - exaggerated the supply and demand equation, falling roughly 9.5% over the course of last week, some of the largest oil companies in the world are giving out huge dividends, proving that they have been doing very well indeed.

Whilst it is not just oil companies that have announced bumper dividends on the UK stock market amounting to a total of £85 billion, it is two oil giants that have been part of that bonanza, those being BP and Shell. Shell's latest quarterly dividend of $0.25 a share, declared last month, was an increase on the equivalent payout last year of $0.24.

There is some discussion among top analysts in the City of London that Shell's dividend payments to shareholders could rise from an expected 79pence this year to £1 in two to three years' time, demonstrating that the continued demand for oil and oil-related products such as fuel for vehicles and heating products for commercial and domestic buildings, is far from slowing down.

Oil giants such as Shell are of course investing in Britain's energy sector with a long-term plan over the next 10 years, having set aside a large amount of capital expenditure (75 per cent of the £20billion to £25billion total spend) earmarked for green energy such as offshore wind, hydrogen and carbon capture.

But green energy and appeasing the lobbies is not where the money has been made so far. Cold, hard supply and demand of the world's most valuable consumable commodity - oil - is where every aspect of the energy market is gauged and oil has been doing extremely well on the commodities and futures markets this year.

That is where these dividends and extra cash to invest in new technology have come from, not windmills.

Further exacerbating the soaring value of crude oil during the early part of 2022 was the request by Russian oil companies that settlements by European and American customers must be made in Rubles due to the euro and US Dollar settlement accounts for Russian companies having become unaccessible due to sanctions.

This has not only driven the value of the Ruble up to the extent where at one point it was the strongest performing currency in the world as it had become a de facto settlement currency for oil, and Europe buys 40% of its oil from Russia, but it has also caused volatility in the Western markets as the US Dollar and Euro had to some extent lost their status as a de facto settlement currency on that part of the commodities market.

Today, crude oil is trading at $89.7 per barrel, which despite the losses of last week, still place it higher than those turbulent times in 2021 when the value was being driven up massively.

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