Three, four or more? As jittery financial markets once again obsessed over the number of times the US Federal Reserve might raise interest rates this year, already vulnerable stock indexes across the world came under renewed pressure. And crude tanked in sympathy.
Equity markets across the US, Europe and Asia began to tumble Tuesday and were poised for a fourth straight day of losses Friday.
Benchmark front-month Brent and WTI crude futures lost 3.9-4.6% cumulatively over Tuesday to Thursday and were in the red in intraday trading Friday, following the direction of stocks in Asia and Europe.
Two major events swayed sentiment in the financial markets this week. One was scheduled testimonies before the US House and Senate committees by the new Federal Reserve chairman Jerome Powell Tuesday and Thursday, which in sum signalled that the central bank was on course for at least three rate hikes through 2018 and possibly a fourth if the economy overheats.
The second, which sent a jolt through the markets Thursday and raised the hackles of US trading partners round the globe, was President Donald Trump’s plan to impose hefty tariffs on steel and aluminium imports into the country.
Trump said that import duties of 25% on steel and 10% on aluminium would be formally announced next week, although White House officials later said some details were yet to be ironed out. The news initially drove up shares of US steel and aluminium makers but triggered a broader selloff across the equity markets on fears that it will stoke inflation by raising input costs in a range of industries reliant on those metals.
Angry responses poured in from China, Japan, the European Commission and Germany, among others, and raised fears of a looming trade war that could have far-reaching economic repercussions.
Crude prices took a hit earlier in the week when the US Energy Information Administration reported a surprisingly large build of just over 3 million barrels in commercial crude inventories in the country for the week ended February 23.
But the bearishness snowballed, first with renewed fears in the financial markets over a hawkish Fed and next with Trump’s tariff plan. The dollar strengthened on the back of the strong interest rate hike worries but weakened amid the tariffs news, though not enough to support crude prices.
The bottomline is that the financial markets continue to have crude in a strangle-hold, which portends more volatility and bouts of weakness ahead.
Understand the mechanics of oil pricing. Learn how global benchmark oil prices are set and how that information percolates down to the price tag at the petrol pump. Attend "What Determines the Price of Oil"with Vandana Hari this March 2018 in Singapore. - https://goo.gl/fz3YrL
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%)