At the World Economic Forum in Davos this week, US Treasury Secretary Steven Mnuchin apparently expressed support for a weaker dollar. That was a major surprise. Historically, the US government’s policy has to been to support a strong greenback, given that it is the world’s reserve currency. A flip to support a weak dollar created a wave of alarm, that the US under Trump could be attempting to make its exports more competitive globally. It caps off a series of trade moves that alarmed America’s Asian allies, particularly China, as the US slapped steep new tariffs on Asian goods, from solar equipment to washing machines.
To be fair, the dollar has been in decline against almost all major currencies over the past year. Against the Euro, it has declined by 3.5% over the past month alone, and against the Japanese Yen and Chinese Yuan by 3.3%. Even the messy ongoing Brexit situation did not prevent the pound from gaining to the US, with the dollar sliding by 5.6%. This has contributed to the gains in crude oil prices over January, since oil is denominated in dollars. As traders moved to sell-off the dollar after Mnuchin’s comments, crude oil prices leapt – touching US$71/b for Brent and US$66/b for WTI.
Mnuchin later walked back on his comments, but announcements by the Trump administration do point to a preference for the advantages a weaker dollar can bring. For oil, that means stimulating demand – a cheaper dollar means cheaper oil in relative terms, particularly in energy hungry Asia. Will this continue over the rest of 2018? Most central banks are turning hawkish, and while the US Federal Reserve is likely to follow suit, stubbornly weak inflation in the US could tie the Fed’s hands in interest rate hikes.
Then there is also the prospect of an accelerating trade war with China, which could retaliate with currency manipulation, or a collapse of the NAFTA, something Canada is apparently already anticipating. Any one of these could send the dollar lower. For oil prices, that’s bullish. Supply/demand fundamentals are good – the US crude just declined for a record 10th week, while demand is perking up – and any weakening in the dollar will only amplify gains.
Is this a turning point for the rise of the Petroyuan? Back in 2012, China planned to price oil in yuan using gold-backed futures contracts in Shanghai. China’s efforts to undermine the dollar’s global dominance is not a new story however it is also not in China’s interest to devalue $1.1 trillion of US Treasuries it currently still holds. Could the world leading oil importer have a central role afterall in the pricing of oil in the future?
Russia, Middle East and other selected Asian countries already accept payment in yuan for trade transactions. If Saudi Arabia adopts the yuan for its oil exports that will send a very strong signal to the world of a big shift. More so if China participates in the upcoming Aramco’s IPO, it may just solidify the move towards the yuan.
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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%)