Crude’s direction on a day-to-day basis has become harder to anticipate, as a growing mix of long and short-term factors influence sentiment and drive volatility. Brent has been in correction mode after breaching $59/barrel on September 25, but the downside has been limited. For those trying to gauge expectations on market rebalancing, the benchmark managing to hold on to the mid-50s on the way down is perhaps more significant than its failure to breach $60 on the way up. The new floor — which could be in the low-50s, as we believe it has not been fully tested yet — signals cautious optimism over supply and demand continuing to be balanced, going into 2018, as OPEC and non-OPEC producers prepare to pump less for longer and US shale looks ready to settle down after a red-hot pace of growth earlier in the year. Meanwhile, widening WTI discounts to Brent and Dubai are spurring US crude exports to new all-time highs. The trend is likely to get a fresh boost as India’s public sector refiners finally begin importing US crude, both conventional as well as tight oil from shale.
Brent continued correcting this week from a 26-month high of just over $59/barrel notched on September 25, as fears of Iraqi supply disruption owing to the Kurdish independence referendum receded fully into the background. The last rally proved resistance at the psychological ceiling of $60, but the North Sea benchmark
may have found a floor in the low-$50s, as market consensus has consolidated around a slow-motion rebalancing in progress.
A troika of factors underpins a more constructive view of fundamentals over the next 12-18 months:
- Growing confidence in the OPEC/non-OPEC cuts being maintained through the end of 2018, pushing aside concerns of an untimely flood of supply returning to the market. Optimism over the world’s two biggest oil producers Russia and Saudi Arabia remaining joined-up in their mission to restrain supplies received a boost this week from Saudi King Salman bin Abdulaziz’s high-powered maiden visit to Moscow.
- Moderating expectations of US production growth as shale producers appear to have reached the limits of productivity gains and face cost and shareholder pressures that are likely to curb aggressive new drilling. Taking into account the US Energy Information Administration’s somewhat divergent weekly and monthly production data so far this year as well as its forecasts, we are factoring in an annual output growth of around 400,000 b/d in 2017, tapering off in 2018 as long as crude prices remain in their current range.
- Cautious optimism over strong global economic growth supporting strong oil demand growth in 2017. The views on the quantum of increase vary and there is plenty of skepticism around the most optimistic 1.6 million b/d year-on-year jump predicted by the International Energy Agency. But few in the market would be willing to bet against it until and unless the upcoming monthly consumption data squash the narrative.
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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%)