Stakeholders and observers in the oil markets are typically well-versed with the fundamental and geopolitical metrics that impact benchmark price movements. They know where and when to look for the usual data, news and sentiment triggers. However, every once in a while, forces outside this ecosystem take control. This month has been one of them.
Crude markets were sucked into a financial vortex February 2 and their volatile price swings — mostly downward — had largely decoupled from oil market fundamentals, we wrote in last week’s Viewsletter.
This week, oil bounced up from two-month lows as global stock markets clawed back some of their massive losses. There was a flurry of keenly-watched OECD stocks data and projections on 2018 supply-demand fundamentals in the monthly OPEC and International Energy Agency reports this week. Those were no doubt factored in by the oil market, but half-heartedly, as it remained preoccupied with the goings-on in the financial world.
The February reports of the US Energy Information Administration, OPEC and the IEA brought into sharp relief two key influencers: 1) Continuing confidence in 2018 strong global oil demand growth, albeit to varying degrees and 2) Expectations of a resurgence in US shale this year driving the country’s oil production growth to a far greater extent than in 2017.
These two issues are likely to shape the debate on oil market rebalancing in the coming weeks but only after the financial markets pandemonium has subsided and crude reconnected with its fundamentals.
OPEC leaders and Russia did their bit to try and counter the growing chatter around US shale potentially neutralising the OPEC/non-OPEC production cuts aimed at rebalancing the global oil markets.
Saudi Arabia, the group’s largest producer and exporter, on February 14 said it will keep its March exports below 7 million b/d despite a scheduled turnaround at its 400,000 b/d Samref refinery in Yanbu.
Saudi energy minister Khalid al-Falih told an industry symposium in Riyadh the same day: “I am confident that our high degree of cooperation and coordination will continue and bring the desired result.”
OPEC secretary-general Mohammad Barkindo, speaking at the same event, reiterated that world oil demand was growing at healthy levels.
Russian energy minister Alexander Novak told Platts in an interview in Moscow February 13 that his country wants to build a long-term relationship with Saudi Arabia and the broad OPEC alliance beyond the current output restraint deal.
Meanwhile, the Russian sovereign wealth fund is said to have pledged to set up a major pool of investors for the upcoming initial public offering of Saudi Aramco. The deepening of Saudi-Russia economic ties offers another layer of reassurance to the market on the de-facto leaders of the OPEC/non-OPEC alliance managing their output cuts to the finish line.
That finish line — drawing down OECD oil stocks to their five-year average levels — was 52 million barrels away at the end of December according to the IEA, and about twice that, according to OPEC. The disparity aside, there is broad agreement that world oil stocks declined in 2017 after consistently rising for the three previous years.
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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%)