Crude, which has fallen into a pattern of limited movements caught in a tug-of-war between evenly matched forces adding and subtracting supply, could be jolted by a hurricane in the US Gulf of Mexico, which was threatening major oil and gas production, refining, import andexport facilities Friday. As the market tracked the hurricane’s path towards Texas and waited to assess the short- and long-term impact of any damage and disruptions, crude was inching up, but gasoline futures had jumped, suggesting bigger worries over products supply. Meanwhile, a growing schism between Brent and WTI is paving the way for rising US crude exports — could that restore the traditional price relationships or is Brent's backwardation a precocious sign of the global oil market rebalancing?
Hurricane Harvey was barreling across the US Gulf of Mexico and towards the coast of Texas Thursday night local time, threatening major offshore oil and gas production and refining in the region, as well as imports and exports of crude and refined products.
Harvey was expected to make a landfall as a Category 3 hurricane Friday night or early Saturday local time and the US National Hurricane Center had warned of “life-threatening inundation from rising water moving inland from the coastline.”
The Gulf of Mexico offshore area pumps about 1.66 million b/d or 17% of the total US oil output. Some 8.44 million b/d or 46% of the country’s refining capacity is located in the Texas and Louisiana Gulf Coast districts.
Terminals in the region process around 3.9 million b/d of crude imports (46% of US total) and about 700,000 b/d of product imports (31%) an well as handling around 2.7 million b/d of finished petroleum product exports (82%).
Producers and refiners were scrambling to evacuate or shut down their facilities as a precautionary measure through Thursday night, while some continued to assess the situation, caught off-guard by the sudden strengthening of a storm that had disintegrated into a tropical depression as it crossed the Yucatan Peninsula earlier in the week.
The last major tropical cyclone to hit Texas was Hurricane Ike, close on the heels of Hurricane Gustav, both in September 2008. Those resulted in 1.3 million b/d of oil production and just over 7 Bcf/day of gas production in the US Gulf being shutin as a precautionary measure. About 85% of oil production and 71% of gas production had been restored in the 12 weeks after Gustav hit. Refining capacity outage peaked at 4 million b/d, but was fully restored in less than six weeks after Gustav.
Hurricanes Katrina and Rita in August and September 2005 respectively were far more destructive and caused longer outages. They shuttered up to 1.5 million b/d of oil and up to 8.8 Bcf/day of gas production. Restoration of supplies occurred gradually from November 2005 through March 2006. Twelve weeks after Katrina struck, a little over 5 Bcf/day of gas and over 1 million b/d of oil production was still shut in.
Beyond the knee-jerk rise in crude and product prices early Friday to factor in the likelihood of oil-related supply disruptions in general, Hurricane Harvey will need to be watched closely over the next 48 hours for a more detailed assessment of the precise nature and likely duration of its impact.
If the hurricane dissipates without causing any major damage to infrastructure and production and refining facilities, any capacity shut in as a precaution should be restarted fairly swiftly, enabling the crude market to return to “normal” within days. In the event of major damage to facilities, the impact could play out differently in the crude and refined products markets, depending on which infrastructure has suffered more.
A major, drawn-out oil production outage would support crude prices, but would also be mitigated by the presence of increased spare capacity available among the 22 OPEC and non-OPEC producers that have restrained supply under their agreements since January, as well as the cushion of brimming oil inventories globally.
If refineries in Texas are damaged and are forced to halt operations for a prolonged period, it would prop up refined product prices, while also pressuring crude down because of reduced demand for the feedstock, driving a rally in product cracks, or the premium of refined products over crude.
Any major disruptions in the imports and exports of crude and products will need to be analysed carefully, for they could well cancel each other out in terms of the balance between crude and refined product supply available in the country.
The market appeared more concerned about products than crude supply through the trading sessions in Asia and Europe Friday. The front-month September NYMEX RBOB gasoline contract changed hands at $1.7295/gal at 1300 GMT Friday, up 4% from Thursday’s settle, while WTI and Brent were up only 0.5% and 1% over the same period. The EIA Wednesday reported a 107,000 b/d rise in US gasoline demand to around 9.63 million b/d in the week to August 18, and a draw of 1.22 million barrels in gasoline stockpiles, supporting sentiment for the fuel amid the ongoing US summer driving demand season.
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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%)