Sentiment about oil prices is at its most bullish in more than two years among European investors, according to a gauge of market mood released on Wednesday.
The Sentix sentiment index for crude oil jumped to +0.3 from -0.1 following last week's agreement by OPEC members to cut production, the first significant cut in output quotas since 2008. The Frankfurt-based Sentix research institute surveyed more than 1,000 institutional and individual investors between Sept. 29 and Oct. 1 for its latest survey.
The Sentix strategic bias indicator, which measures investors' six-month price expectations, has been rising since last May; it increased by 0.1 to 0.25 points in the last survey.
"Ideally, growing confidence precedes portfolio commitments and indicates that investors enter the market as buyers in rising numbers," Julien Mueller, an analyst with the Sentix institute, said in a statement.
This rising confidence could lift the shares of oil majors in Europe even more, after the formerly beleaguered stocks made an impressive comeback over the past year.
The European integrated oil sector posted a year-to-date return of 25.4% and has risen by more than 20% over the past year, according to FactSet data.
The two main companies in the sector are BP (BP) and Royal Dutch Shell (RDS.A) (RDS.B) . BP's London SE shares (LON:BP) have rallied more than 30% year to date, while Royal Dutch Shell's London SE B shares (LON:RDSB) have jumped by more than 35%.
That is quite a performance. These two companies are portfolio favorites not only because investors want to take advantage of the rising price of oil, but also because they offer something that is increasingly hard to find: yield.
Royal Dutch Shell boasts a 7% dividend yield, well above its 5.6% five-year average, according to FactSet data. The problem is the dividend cover, which is unsustainable if we look at last year's figures: diluted earnings per share of £0.3 ($0.4) had to pay for a dividend per share of £1.26.
Clearly, that payout is not sustainable if its earnings do not improve. But now it can be argued that with the price of oil set to rise due to the OPEC production cut, Royal Dutch Shell's earnings will improve enough to cover the dividend comfortably.
If anything, BP is in a worse situation. It has a juicy dividend yield of 7.6% vs. a five-year average of 5.5%. Last year, it had diluted losses per share of £0.23, yet insisted on paying its shareholders a dividend of £0.27, higher than 2014's £0.25 dividend.
A London-based fund manager recently said during a meeting with journalists that there was a 50-50 chance that these two oil majors would cut their dividend. Perhaps if oil prices do indeed increase as the Sentix sentiment gauge indicates, the odds of that happening will lengthen.
Editor's Note: This story has been updated to clarify that YTD stock performance numbers for BP and Royal Dutch Shell are based on the London SE shares, not the ADRs.