Crude hit fresh six-month lows this week, with Brent breaching the $48/barrel presumed support level, pounded by a surprise build in crude and product stocks in the US. We don’t see a tailspin, though prices could ease some more before recovering. A 500,000 b/d slide in weekly US gasoline demand could well be an aberration, in which case we expect a price correction next week and further upswings in the weeks ahead if Q2 data shows oil stock draws in the OECD and elsewhere, as expected. The oil market is firmly in the clutches of ‘short-termism’ and nervousness, which spells volatility ahead, something we flagged in our Oil Viewsletter last week. The Qatar crisis could deteriorate further before it gets better, but for now, there isn’t a case for any major impact on oil supply.
Benchmark crude prices were languishing at fresh six-month lows early Friday in Asia, battered by a shocking build in US commercial crude, gasoline and gasoil inventories reported by the Energy Information Administration for the week ended June 2. The biggest question in the minds of market participants and observers was: Is crude going to continue spiralling down? We see that as unlikely, though prices could ease some more before finding a bottom. A lot
would depend on US inventory data next week.
In our June 2 issue, we talked about crude being firmly in the grip of bearish sentiment, driven by anxiety over rising US tight oil production and impatience to see global oil stocks drain. We cautioned that the market was in for a period of high volatility, though we did not expect to be proved right so soon.
We expect crude to be whipsawed through the third quarter of this year, when all the opposing forces on supply are in full play and jostling for the driver’s seat on prices. That would contrast with the relative stability in January this year, when prices rose to levels that remain the highest year-to-date, purely on anticipation and optimism, and without the benefit of data in hand to establish the impact of the OPEC/non-OPEC cuts and shale’s response to higher prices.
Brent skids through $48/barrel support level
Front-month August Brent futures broke through the $48/barrel presumed support level this week, but WTI was holding up slightly better, above $45. Though the overall pressure on crude was coming from the build in US stockpiles, rising Atlantic Basin supply, thanks to recent increases in Libyan and Nigerian production, exerted more pressure on Brent relative to WTI. The front-month WTI/Brent spread crunched to less than minus $2/barrel this week, the narrowest in more than three months.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)