Home Energy BP and Shell shrug off windfall tax, while retailers cheer a boost to consumers’ disposal income

BP and Shell shrug off windfall tax, while retailers cheer a boost to consumers’ disposal income

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Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

‘’As Chancellor Rishi Sunak perfected his U-turn on a windfall tax, the share prices of BP and Shell also looped lower, before climbing back up, as investors shrugged off its impact given that it is expected to be a short lived hit.

It may mean dividends are pushed lower temporarily, but given that tax will reduce if companies invest more, it’s likely to mean an acceleration of investment by BP and Shell, a strategy which will be welcomed by many investors who see environmental progress and not just shareholder pay-outs as crucial for their long term growth prospects.

A chunk of profit may still be scooped from the oil and gas majors but the levy will still represent just the cream on the top of fat volumes of cash being generated by energy giants due to the higher price of oil. A barrel of Brent crude, the international benchmark, has edged higher to just shy of $115 dollars. It is up by around 50% since the start of the year pushed higher by the outbreak of war in Ukraine.

Putting hundreds of pounds back in the purses of hard pressed consumers has also helped lift shares in retailers, which have been sliding over the feared repercussions of the cost-of-living crisis. Ocado, Next and B&M European Value Retail and Primark owner Associated British Foods climbed sharply amid hopes that shoppers will keep spending briskly, now that household incomes won’t take such a battering.

It’s not clear exactly what range the normal pricing will be for the windfall tax to be blown away but a lower oil price would see the levy being lifted. However for now the price is set to stay elevated due to significant supply concerns.

The US has banned Russian energy imports and the UK will phase them out by the end of 2022. An EU crude embargo on Russian oil is inching closer amid ongoing discussions about concessions to Hungary, a country which is heavily reliant on the imports. If a ban is slapped on, European countries would look elsewhere in the world for their needs.

OPEC+, the cartel of oil producing nations has been hesitant about turning on the taps more fully adding to the squeeze in supplies, partly due to production capacity issues. The wariness among energy firms about investing in fossil fuels as pressure mounts for the transition to greener energy appears to be acting as a cap on money flowing into production. Meanwhile demand is staying buoyant, despite ongoing concerns over China’s zero-Covid policy leading to a drop in consumption.  Recent data for mid- May has shown a fall in U.S. crude and gasoline inventories. This comes just as demand for oil is expected to rise in the coming weeks as the so-called driving season in the US revs up and millions of Americans are set to release pent-up demand for travelling and head off on trips over the summer. Slowing economies however could pull down the price of oil. The UK is forecast to enter recession by the end of the year and US economic growth is also expected to cool off which could lower demand for crude. ‘’

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