Another weekly plunge in US crude inventories produced an uptick in crude prices midweek,but the momentum fizzled out soon after. OPEC as well as the International Energy Agency reported a drop in commercial oil inventories in the OECD countries in June, but failed to revive crude’s rally. And yet, the spread between front- and second-month ICE Brent futures flipped into backwardation this week, typically the sign of a tight market. WTI remained firmly in contango. We believe Brent’s backwardation stems from transient factors propping up the North Sea market rather than being a signal of an imminent rebalancing of global supply and demand. Is OPEC giving up? Not only was its July compliance with the production cut agreement the worst so far, but prominently, Saudi Arabia, which had been reducing output beyond its commitment, also over-produced, for the first time ever.
Crude’s rally since late July, which rescued it from seven-month lows and propped Brent comfortably back above $50/barrel, lost steam this week. That was not from any particularly bearish news, as much as the absence of support aside from a surprisingly large US weekly crude draw of 6.45 million barrels reported by the Energy Information Administration.
The latest monthly market reports from OPEC and the International Energy Agency this week both pointed to a decline in OECD oil inventories in June. They were also close on the size of the drop, pegged at 22 million barrels by OPEC and 19.3 million barrels by the IEA, but the data failed to lift market sentiment.
OECD crude and product inventories may have finally started to ease after six months of hefty OPEC/non-OPEC output cuts, but remained 252 million barrels above their five-year average according to OPEC, and 219 million barrels above as per the IEA.
A decline in oil inventories is what OPEC has been targeting with its production cuts in collaboration with non-OPEC and what the market has been anxiously waiting to see, but the June dip was too little too late. It came on the back of a seasonal spike in consumption, and may have seen a repeat in July, going by the IEA’s preliminary estimates. But the question is, will it sustain through the third quarter, traditionally a period of slow demand between the summer and winter peaks?
OPEC and the IEA also revised up their estimates for 2017 global oil demand growth this week — to 1.37 million b/d and 1.5 million b/d year-on-year respectively — extrapolating from a stronger second quarter in the OECD and counting on higher global economic growth this year.
But the oil market has been left contemplating the dichotomy between forecasts of robust demand growth, which may or may not come to pass, and burgeoning supply from OPEC and the US, which is undeniably evident. The market rebalancing narrative is still weak, putting crude in no-man’s-land: not quite ready to be claimed by either the bulls or the bears.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
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%)