European oil companies have sought to slim down this year, cut oil production and improve shareholder returns, and the oil market has entered a deep contrarian spread

Europe's big oil companies are planning to use the windfall from high oil prices to slim down, and a sharp drop in oil inventories and optimism about a recovery in demand have pushed Brent and U.
S.
crude futures into a deep contrarian spread
.

Europe's big oil companies are planning to use the windfall from high oil prices to slim down
.

Soaring oil and gas prices in 2021 generated billions of dollars in profits for big oil companies, in stark contrast to the year before, when the coronavirus pandemic hit tourism and economic activity, causing energy prices to plummet
.

Typically, companies invest most of their profits in long-term projects to boost oil and gas production and reserves
.
Oil and gas production and reserves decreased
significantly in the previous year.

But unlike at any time in history, BP, Royal Netherlands/Shell, TotalEnergies, Norwegian energy company Equinor and Italian oil producer Eni are focusing on pleasing shareholders as they begin to shift to low-carbon and renewable energy
.

Ben Cook, portfolio manager at BP Capital Fund Advisors, said: "All the big oil companies are dealing with some degree of decline, shifting their focus to fields that provide greater returns on investment for shareholders and leaving more mature assets behind
.
”

Constant pressure from investors, activists and governments to tackle climate change means European oil majors are shutting down the faucet on oil spending, even as the outlook for oil prices and demand remains strong
.

Shell sold its Permian shale oil business in the United States in September for $9.
5 billion and pledged to return $7 billion to investors, underscoring the company's two-pronged strategy
of cutting oil production and improving shareholder returns.

Investors in U.
S.
businesses can also expect their dividends to rise to record levels, but U.
S.
oil and gas giants Exxon Mobil and Chevron are on the back of White House calls to increase oil output to address high energy prices and high inflation.

According to Bernstein's analysis, European companies will return a record $54 billion to investors in 2022 through dividends and share buybacks, compared with more than $30 billion
from ExxonMobil and Chevron combined.

Chart: Major European energy companies are reducing their oil production as they shift to low-carbon energy sources

Oil production by Europe's five largest energy companies, after peaking at about 7 million b/d in 2025, will fall by more than 15 percent to less than
6 million b/d in 2030 after peaking at about 7 million b/d in 2025, according to Bernstein Research, according to Bernstein Research.

BP said it would cut oil production by 40 percent, or about 1 million barrels
per day, from 2019 levels by 2030.
Shell said its oil production had peaked in 2019, while Italian oil producer Eni said its output would stabilize in 2025
.

Chart: As major European energy companies shift to low-carbon energy, they improve shareholder returns

With the energy transition in full swing, investors are happy to see their returns back in focus
.
Oil majors have been pioneers in oil and gas extraction for more than a century, from drilling in the Middle East to deep-sea extraction, pouring billions of dollars into large, complex projects that are over budget and behind schedule, resulting in low
returns in the decade after 2010.

Alasdair McKinnon, of the Scottish Investment Fund, said: "The strategies for the energy transition are becoming clearer, but given past failures, investors will not believe them, so these companies will need to demonstrate that they can effectively implement them and be profitable
.
"

Harvest season

Some oil output will remain a key fuel during the energy transition, and will increase
as countries such as India and China seek to replace coal, the most polluting fossil fuel, with natural gas.

Meanwhile, Europe's oil majors are shifting spending to renewable energy sources such as wind and solar, promising that in the long run, returns from their low-carbon businesses will match or even exceed those of oil and gas
.

That's in stark contrast to U.
S.
companies, with ExxonMobil and Chevron largely moving away from renewable energy
.
Chevron CEO Mike Worth said renewables "don't generate the double-digit percentage returns that investors want.
"

Investment by European companies in new oil development has fallen sharply in recent years, which is expected to lead to a shortfall in supply and help drive oil prices higher
in the long run.

Russ Mould, investment director at online platform AJ Bell, said: "This caution is likely to support oil prices as energy demand looks set to continue to grow.
.
.
Supply is likely to be constrained, especially as renewable energy and alternative sources of electricity do not yet appear to be able to make up for the baseload gap
.
”

According to the U.
S.
Energy Information Administration (EIA), oil demand is expected to peak
around 2030.

"Companies will resist the temptation to re-ramp production, and oil executives are aware of public pressure, their environmental responsibilities, and the condemnation
that any big new project may provoke," Mould said.
”

BP Capital Fund's Cook said
.
Europe's strategy will be a test case, "it's hard to say who is right and who is wrong
when it comes to the pace of transformation.
" Time will tell if Europe is going too fast
.
”

The sharp decline in oil inventories and optimism about a recovery in demand have pushed Brent and U.
S.
crude futures into a deep inverse spread
.

Adverse spreads mean that the current price is higher than the price a few months from now, encouraging traders to release oil stocks and sell
them quickly.

The Brent crude oil March-April contract spread was $0.
70 on Monday, compared to minus $
0.
10 on Dec.
21.
The front-month spread for U.
S.
crude oil is about $
0.
50.

Jeffrey Halley, senior market analyst at OANDA, said, "The inverse spread on the oil futures curve is starting to widen again, indicating strong near-term demand,"

The difference between the March and September Brent contracts was at $3.
81 on Monday, compared with nearly $
1.
50 in mid-December.

Chart: Oil price structure suggests firm demand

Giovanni Staunovo, commodity analyst at UBS, said, "Two factors have supported the contrarian spread in recent quarters: first, oil inventories have fallen sharply since mid-2020; The second is OPEC+'s spare capacity plus their commitment to increase supply in the future,"

OPEC+, a group of OPEC and its allies, agreed in early January to increase production by another 400,000 b/d in February, suggesting that the gap between actual and committed crude supply could widen
further if larger producers do not fill the gap.

As demand recovers from the 2020 collapse, OPEC+ is gradually easing its 2020 production cuts
.
But many smaller producers have been unable to boost supply, while others have been wary of excessive production increases to prevent a resurgence
.

Brent crude futures rose as high as $83 a barrel on Friday, the highest since Dec.
24, and are currently trading near
$91.
95.

Ole Hansen, head of commodity strategy at Saxo Bank, said strong demand and a surge in Omicron cases had limited impact, keeping oil prices stable
.

"Several producers have reached production limits, some of them due to a lack of investment, which may make it difficult for OPEC+ to meet its future production increase commitments and support oil prices," he said.