As predicted, the OPEC meeting in Vienna yielded an extension of the current supply freeze deal from March 31, 2018 to December 31, 2018. This had been telegraphed well in advance of the meeting; in response to the official announcement, Brent prices slipped slightly – a sign that traders were disappointed that a more aggressive deal did not emerge.
There is signs for cheer, though. OPEC managed to get Libya and Nigeria – exempt from the last round of cuts – to agree to cap their 2018 output at a collective 2.8 mmb/d, which acknowledging the fact that both countries were still facing insurgent forces within their borders. All other OPEC production level limits will remain in place; compliance to the deal has been unusually high by OPEC standards, and despite geopolitical squabbles, OPEC’s oil ministers are at least united. Compliance among the NOPEC bloc, however, has been spottier. With countries like South Sudan announcing plans to increase output well above the rates agreed to in June, it is unlikely that NOPEC will meet its (voluntary) production commitments.
But even with that, there is evidence that the global supply glut is reducing. With world economic growth estimates trending more positive for 2018, OPEC itself thinks the market will reach balance by mid-2018. Which is why major OPEC nations including Iraq and Iran insisted on language that allowed OPEC to revisit or even retire the deal in June 2018, should the market tighten. With disruption risks ongoing in Libya and Nigeria, Venezuela on the verge of default and the Middle East embroiled in a political standoff, overheating could come even sooner. At the meeting, Russia insisted that OPEC develop a clear exit strategy from the deal, evidence that OPEC is not considering an extension into 2019. Even US shale producers are seeing the signs, issuing warnings that aggressive expansion could reverse all the good the OPEC deal has done and create another price crash. The extension of the deal is necessary, for now, but it clear that the oil world needs to start preparing for a post-deal environment.
The current breakdown of the OPEC and Non-OPEC oil production deal
OPEC production level limit
Estimated Non-OPEC production level limit
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
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%)