The probability that Britain, France and Germany would be able to bridge the divide between a hawkish US administration under President Donald Trump threatening to walk away from the Iran nuclear deal and an indignant leadership in Tehran had always appeared slim.
This week, French President Emmanuel Macron ended an official visit to the US by telling reporters he had probably failed in his efforts to persuade Trump to stay in the landmark 2015 agreement. The deal lifted crippling Western sanctions against Iran’s nuclear program, which at their peak over 2012-2015, had shut in up to 1 million b/d of the OPEC member’s crude exports.
Trump has demanded removal of a sunset clause in the nuclear agreement and imposition of new restrictions on Iran’s ballistic missile program as well as on its involvement in the internal affairs of its neighbouring countries, among other conditions, to continue waiving US sanctions against the Islamic Republic after May 12.
Meanwhile, Russia and China, the other signatories to the deal, have knocked on the doors of the UN, seeking “unwavering support” for the agreement from its members.
With a fortnight to go before the deadline, the oil market continues to price in the impact of a resumption of US financial sanctions against Iran.
However, with no precedent of a so-called “snap-back” to refer to, there is also a great deal of uncertainty and a variety of outcomes to ponder. We look at the known unknowns and weigh their probability and impact in this issue of the Viewsletter.
Tensions between Saudi Arabia and Yemen continue to escalate. Incidents of Yemen’s Houthi firing missiles across the border into Saudi Arabia have increased and this week, a Saudi-led coalition launched an air strike on the southern neighbour, reportedly killing dozens of people.
The geopolitical risks to oil supply have come to dominate market sentiment to such an extent that even a bearish US weekly inventory report by the Energy Information Administration, showing a substantial build in crude stocks, could not hold Brent back from rallying to a fresh 40-month-high close of $74.74/barrel Thursday.
The list of major oil producers with geological or geopolitical crimps on production and supply infrastructure continues to grow. The problems squeezing production in countries like Libya, Nigeria, Venezuela and Mexico are well known.
Canada is a somewhat unexpected new addition to this list. The country’s oil sands producers, battered by months of low prices amid severe transportation bottlenecks, are starting to throttle back.
Inflation expectations returned to the market this week, with the US 10- year Treasury yield vaulting over the key psychological mark of 3%. The US dollar rallied to a four-month high this week, but failed to dampen the bullish sentiment in crude.
Market players may need to brace for $80!
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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%)