OPEC/non-OPEC supply boost likely but keeps oil market on a knife-edge
A fortnight after an unexpected proposal to boost global oil supply by 1 million b/d emerged from a meeting of the Saudi and Russian energy ministers in St. Petersburg, the market has been left hanging in suspense as to whether or not it will be implemented.
The difference between a “yes” and a “no” has so far amounted to a spread of around $4/barrel for Brent futures, between a nervous market driving up prices towards the $80/bbl psychological mark and furiously selling off to pre-empt an increase in supply.
Should a production hike of 1 million b/d be agreed, we estimate a slump of another $4/barrel or so in Brent, cooling it to the low-$70s compared with the 42-month high close of $79.80 notched on May 23.
Between the two diametrically opposite options of raising output by 1 million b/d and keeping the current cuts intact, lies the possibility of agreeing a smaller boost, as we discussed in last weeks viewsletter. The increment would need to be at least more than 500,000 b/d. Anything less would be ineffective in countering the unintended losses from Venezuela and Iran, among others, likely leaving Brent in the mid-$70s, ready to spike again if the supply tightness worsens. As we have said before, even an increase of 1 million b/d is conservative.
Global oil production uncertainties are the highest since the Arab Spring took hold in 2011 and could swing the market into a supply shock that leaves OPEC struggling to plug the gap promptly, or worse, plugging it at all, given the group’s limited spare capacity.
These supply uncertainties arise from accelerating natural declines in conventional oil fields across the globe, amplified by sustained and severe cuts in upstream investment since 2015; delays and teething issues in the few greenfield oil projects coming online; and heightened geopolitical tensions haunting several major oil-producing countries.
Meanwhile, WTI has drifted off again, disconnecting from the global markets. August NYMEX WTI futures closed at a discount of $11.43/barrel to the corresponding ICE Brent contract on June 7, the widest since February 2015. WTI Midland, the price of tight oil in the prolific Permian basin, remains under pressure as surging production has bumped against pipeline takeaway capacity and the forward curve shows a dim view of wellhead prices until September 2019.
WTI Midland is also dragging down NYMEX WTI futures, which represent the value of barrels at the Cushing storage in Oklahoma. Such is the bearish outlook due to the Permian/Cushing bottleneck that not even a third consecutive weekly decline in Cushing stocks reported by the US Energy Information Administration on Wednesday provided any lift.
The drama around Venezuelan output and Iran sanctions has reached a crescendo. We bring you our perspective on the latest twists and what they mean for the ministers meeting in Vienna on June 22.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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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%)