Eighteen months after OPEC’s momentous decision in November 2016 to slash production in concert with a group of major non-OPEC producers to drain the world’s bloated inventories and shore up crude prices, the group is at a crossroads again.
Commercial oil inventories in the OECD countries are estimated to have finally come in line with or fallen slightly below their five-year average over the past two months, achieving OPEC’s target nearly nine months before its production restraint agreement is set to expire.
Disciplined OPEC/non-OPEC cuts, aided by strong global oil demand growth, have finally managed to reverse the persistent build in global oil stocks since early 2014 to a near-continuous draw-down from mid-2017.
Brent, which tanked to a 13-year-low of $27.88/barrel on 20 January 2016, repeatedly flirted with the $80 key psychological level this week.
The world is now bracing for more spikes, anticipating protracted supply issues in OPEC producers Iran and Venezuela, combined with intermittent disruptions in Libya and Nigeria against a thinning cushion of stocks and spare production capacity while consumption growth remains robust.
Alarm bells are going off among consumers and OPEC will need to respond. Neither the threat of declining Iranian supplies nor the downward spiral in Venezuelan production are problems of OPEC’s making. But if crude continues its march above $80, the group will be hard-put to justify its curbs — especially now that OECD stocks have fallen to five-year average levels.
The pressure is already on. Saudi energy minister Khalid al-Falih this week had phone conversations with his counterparts in the US, South Korea, India, the UAE and Russia as well as the International Energy Agency’s Executive Director Fatih Birol. In a call with the Indian oil minister Dharmendra Pradhan on Thursday, Al-Falih said Saudi Arabia will ensure market stability and adequate oil supplies. Pradhan expressed concern over the impact of high crude prices on the Indian consumer and economy.
UAE energy minister Suhail al-Mazrouei and Al-Falih were said to have concluded in their conversation that the oil market remained well-supplied and the recent price surge was driven by geopolitics rather than fundamentals.
That might well be the case. There appears to be enough prompt supply. The big worry is over an accelerated tightening in the coming months. The recent sharp narrowing of the backwardation at the front end of the Brent futures curve and the return of contango in the front two months of WTI futures contracts supports that view. It reflects active buying in forward contract months, lifting their prices relative to the prompt barrels.
Anxiety over a crimp in Iranian supply as US sanctions kick in on November 4, combined with a tailspin in Venezuelan production, especially if the US imposes sanctions against its oil sector, is real.
OPEC has to take a view beyond the spot market and factor in the fears. When it meets on June 22 in Vienna to decide on its supply policy for the next six months, it needs to have a strategy in place to address sudden supply shocks. If the group takes its role as a market balancing agent seriously, the time has come to walk the talk.
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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%)