We will take the liberty of adapting Henry Ford’s famous quote to say: “Whether you think you are a bull or whether you think you are bear, you are right!” Either side of the divide could marshal enough arguments to support its case this week, though clearly the bulls were louder as Brent attempted to brush up against the $60 mark for the first time since July 2015. The futures market is notoriously given to short-termism when establishing prices, and it was understandably hard to look beyond one’s nose as crude rallied beyond the year’s previous peak. So, we took it upon ourselves to bring the bearish factors in clear view, including the fact that the worst fears of supply disruption as result of the Kurdish independence referendum were not realized, and remain a tail risk at best in an otherwise comfortably oversupplied world. OPEC basked in reflected glory, but it would be premature to declare its strategy a clear win. Demand growth projections could yet leave the optimists in the lurch. Meanwhile, away from Brent’s backwardation is the continuing WTI contango, which is giving US producers an opportunity to hedge and lock in prices above $50 for output a year from now.
“Is Brent in a bubble waiting to burst?” we asked in last Friday’s Viewsletter. It didn’t burst (which to us meant giving up most of its premium above $52) and a few oil experts we hold in high regard argued with us this week that it wasn't a bubble, either.
Some of the oil trading and analyst heavyweights gathered in Singapore for the 33rd Asia Pacific Petroleum Conference over September 25-27 were sanguinely bullish. Speaker Ben Luckock, co-head of group market risk at Swiss trader Trafigura, grabbed imaginations and headlines by suggesting that 2018 could mark the end of “lower-for-longer” oil prices.
As front-month ICE Brent futures rallied to a high not seen in two years above $59/barrel Monday amid tensions over the Kurdish independence referendum and flirted with the $60 high-water mark in subsequent trading sessions, being a bull was de rigueur. Cautioning the industry to not forget the bearish factors still looming in the background risked making you a party pooper.
The prospect of a new wave of demand destruction advancing towards the oil industry in the shape of electric vehicles and the sharing economy got the cursory nod in conference presentations and networking chatter at the seemingly endless cocktail receptions, but wasn’t spoiling the mood for most.
Giddy talk of this year’s “surprisingly strong demand growth” and how it would rid the world of oversupply, helped by the OPEC/non-OPEC cuts (which were hastily declared an unmitigated success) and speculation over the declining fortunes of the US shale industry dominated groupthink.
Coincidentally, as the parties petered out, Brent had corrected down to the $57/barrel level. WTI, which had rallied only to sevenmonth highs, was holding just over $51 Friday. If there is a bull run, be ready to run fast and change course swiftly. The underlying fundamentals of oversupply, we believe, remain firmly in place.
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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%)