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Does BP's conversion signal the end of Big Oil?

CNN logo CNN 8/10/2020 By Julia Horowitz, CNN Business
a sign on a pole: BP logos are seen at a BP petrol and diesel filling station southeast of London on June 15, 2020, following the announcement that the oil giant will take a hit of up to $17.5 billion (11.4 billion euros and 15.3 billion euros), due to the ongoing COVID-19 global pandemic. - British energy giant BP said Monday that it will take a hit of up to $17.5 billion in the second quarter as "sustained" coronavirus fallout ravages global oil demand. The company, fresh from outlining plans to axe almost 10,000 jobs on COVID-19 fallout, said in a statement that it will suffer a negative impact of between $13 billion and $17.5 billion (11.4 billion euros and 15.3 billion euros) in non-cash impairments and write-offs. (Photo by Ben STANSALL / AFP) (Photo by BEN STANSALL/AFP via Getty Images) © BEN STANSALL/AFP/Getty Images BP logos are seen at a BP petrol and diesel filling station southeast of London on June 15, 2020, following the announcement that the oil giant will take a hit of up to $17.5 billion (11.4 billion euros and 15.3 billion euros), due to the ongoing COVID-19 global pandemic. - British energy giant BP said Monday that it will take a hit of up to $17.5 billion in the second quarter as "sustained" coronavirus fallout ravages global oil demand. The company, fresh from outlining plans to axe almost 10,000 jobs on COVID-19 fallout, said in a statement that it will suffer a negative impact of between $13 billion and $17.5 billion (11.4 billion euros and 15.3 billion euros) in non-cash impairments and write-offs. (Photo by Ben STANSALL / AFP) (Photo by BEN STANSALL/AFP via Getty Images)

The plunge in oil demand caused by the pandemic won't fix the climate crisis. But it could force the oil industry to accelerate a shift away from fossil fuels as executives try to carve out a future in clean energy.

What's happening: UBS analysts estimate that earnings in the sector were down 172% on average last quarter compared to the same period a year ago. That puts pressure on producers to make big strategy moves that companies have long resisted.

See here: BP said last week that it would slash oil and gas production and pour billions of dollars into clean energy, speeding up a transition it teased earlier this year.

The company said it now expects demand for fossil fuels to fall by 75% over the next 30 years if the increase in global temperatures is limited to 1.5 degrees Celsius, or by 50% if warming is less than 2 degrees.

"Energy markets have begun a process of fundamental lasting change, shifting increasingly towards low carbon and renewables," BP chairman Helge Lund told analysts. "Over the longer term, the demand for both oil and gas will be increasingly challenged."

Other industry giants have been less willing to discuss plans to leave oil behind. That includes Saudi Aramco, which is due to report earnings this week.

The massive Saudi oil monopoly has seen shares drop 6.5% this year in light of plummeting oil prices. Brent crude futures, the global benchmark, are off more than 30% year-to-date.

The fall in the company's stock was enough to unseat Aramco as the most valuable public company in the world. With a market value of $1.76 trillion, it's now No. 2 behind Apple, which is worth $1.95 trillion.

Oil and gas shares have largely recovered from their crash earlier this year when crude briefly went negative. But clients are still "wary," according to Citi strategist Tobias Levkovich — a sign of the challenges to come.

"Some banks are backing away from lending money to the industry, and shareholders are being pressured by activists to stay clear of hydrocarbons," Levkovich said in recent research note. "We have heard clients note that it is too hard to make money in these stocks, and their representation within the [S&P 500] index is small, so why even bother?"

Investors have been on a 'buy everything' tear

What do tech stocks, highly-rated corporate bonds, government bonds and gold have in common? Right now, investors want to buy them all.

The market comeback in recent months has been characterized by a "buy everything" ethos. And despite rising US-China tensions, uncertainty about the next round of US stimulus spending, and a huge hit to corporate earnings amid a sharp recession, investors have reaped solid returns on a wide range of assets.

The result: The CNN Business Fear & Greed Index, which tracks market sentiment, is back in "greed" territory. One month ago it had a "neutral" reading.

That riskier assets like stocks and corporate bonds are rallying alongside traditional safe havens like gold and US Treasuries is unusual.

The rush to gold has been particularly acute. Exchange-traded funds backed by gold have seen eight straight months of inflows, according to the World Gold Council, and holdings reached an all-time high in July.

At the same time, the Nasdaq keeps touching new records, and the S&P 500 is back near its February peak.

Remember: JPMorgan strategists warned in June that it would be prudent to rethink the "everything wins" playbook, making the case for greater selectivity heading into the second half of the year.

Some investors could be starting to heed that advice. Last week, riskier bond funds suffered their first outflow in 19 weeks, ending the longest streak of inflows since 2013, according to Bank of America. Equity funds recorded their first outflow in four weeks.

But Wall Street doesn't seem ready to end the party just yet. After all, US financial assets are now more than six times the country's GDP, according to Bank of America. "Still maximum bullish," chief investment strategist Michael Hartnett observed.

Up next

Tuesday: Softbank and InterContinental earnings; Germany economic sentiment survey

Wednesday: UK GDP; US inflation data; Cathay Pacific, Foxconn, Lyft, Just Eat Takeaway, Tencent, SmileDirectClub and Cisco earnings

Thursday: Baidu earnings

Friday: China and US retail sales and industrial production data

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