Politics, suspense, discord and drama — OPEC’s June 22 meeting in Vienna had all the ingredients of a thriller. Then, it ended in an anticlimax.
The formal agreements signed by OPEC’s 14 ministers on Friday and by OPEC and its 10 non-OPEC collaborators on Saturday were general and vague. The OPEC communiques simply said the countries agreed to “strive to adhere” to their target production levels to correct cuts that had swung deeper than intended.
Without specifics, OPEC’s decision Friday barely qualified as a “deal.” It was a guiding principle at best and a smokescreen at worst, saving face for Iran and others opposed to a proposed 1 million b/d hike. But as it turned out, it gave Saudi Arabia and Russia the leeway they needed.
Though the highly anticipated decision from Vienna on Friday left observers nonplussed, it preserved the image that as a group, OPEC remained cohesive and in control of the market. That was important after the emergence of major rifts within the organization and suggestions that it was doing the US’ bidding by deciding to raise supply.
The real deal, which was sealed during the OPEC/non-OPEC meeting in Vienna on Saturday, is that several producers will start putting more oil — up to 1 million b/d — into the market starting in July. The Saudi and Russian energy ministers didn’t mince their words while articulating the agreement and their supply boost plans to the media. Iranian oil minister Bĳan Zanganeh had departed Vienna by then and his starkly different interpretation of Friday’s deal was pushed aside.
Which countries will now starting pumping more is relatively easier to guess. How much more they will produce is trickier to say, though estimates of actual addition of barrels point to around 600,000 b/d.
Individual country quotas agreed in November 2016 will need to be formally adjusted to ensure that the supply shortfall from Venezuela and potentially Iran in the coming months is offset by members with spare capacity. Curiously, that important job of rejigging quotas has been left to the OPEC/non-OPEC Joint Ministerial Monitoring Committee.
The fact that Saudi Arabia and Russia co-chair the committee should smooth the way. But renewed friction with the “no-hike” camp, especially Iran, which insists that producers with spare capacity should not be allowed to compensate for those falling short, is likely. In the coming months, Iran will have to either fall in line or risk becoming a pariah.
Crude’s 3-5% spike Friday was a knee-jerk reaction to a confusing picture. As Monday dawned in Asia, Brent futures had hit the skids.
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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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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%)