Brent had vaulted over the key psychological level of $70/barrel as we wrapped up this edition Friday night in Singapore, while WTI had climbed above $65. “Geopolitical storms poised to shake crude out of its languor” was the headline of our Viewsletter last Friday, and it proved to be prescient.
Worries over the fate of the Iran nuclear deal had already started gathering steam last week after US President Donald Trump fired Secretary of State Rex Tillerson, a moderate, and named Iran hardliner Mike Pompeo as his replacement.
The anxiety got worse this week. First, it was comments by Saudi Crown Prince Mohammed Bin Salman and Foreign Minister Adel Al-Jubeir during their visit to the US. Al-Jubeir denounced the 2015 multilateral Iran nuclear agreement as “flawed,” echoing Trump’s sentiment, while MBS reiterated his threat that Saudi Arabia would develop a nuclear bomb if Iran did so.
Exacerbating the picture was Trump’s appointment Thursday of John Bolton, a hawk on North Korea and Iran, as his national security advisor effective April 9, replacing H R McMaster. In an August 2017 piece Bolton wrote in the National Review magazine, he laid out a game plan for the US to abrogate the nuclear deal on the basis of “significant Iran violations,” which he said should be documented in detail in a white paper, alongside early consultations with “key players such as the UK, France, Germany, Israel and Saudi Arabia”, to get them on board.
Yemen’s Houthi rebels fired a ballistic missile across the border into Saudi Arabia’s Najran province Thursday. Though no damage or disruption to the oil and gas processing and loading operations was reported, the incident served as a reminder of the tensions bubbling just below the surface in the Middle East. Yemen has been racked by a proxy war between regional archrivals Iran and Saudi Arabia.
Canadian oil sands producer Cenovus Thursday said it had been forced to reduce output in the face of pipeline and rail capacity constraints in shipping crude. The country’s growing oil transportation bottlenecks over the past few months were well-known, but the Cenovus news lent more gravity to the situation and added to the market’s supply concerns.
NYMEX WTI futures comfortably returned to backwardation at the front end of the forward curve Wednesday, ending six days of contango. The backwardation along the rest of the curve also strengthened, suggesting tightening supply-demand balances.
The US Federal Reserve announced a quarter-point hike in interest rates Wednesday, as was widely expected, and more importantly, signalled it remained on course for two more increases this year. That gave the financial markets, rattled by fears of accelerating inflation leading to a more hawkish Fed since February, some breathing room. But not for long. The US announced plans to slap tariffs on $60 billion worth of annual imports of Chinese goods, and China retaliated with its own list of tariffs against the US. The trade wars have only just begun, it seems. The stock markets took a beating, but not crude — it was back in the grip of fundamentals and fears.
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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%)