Despite disagreements leading up to the June 22 meeting of OPEC in Vienna, the cartel and its Russian-led allies agreed to a ‘substantial output boost.’ It presents a victory to Saudi Arabia and Russia, the twin giants that have been the leading proponents of a supply hike over the past month, as the alliance sought to reassure markets that any shortfall in OPEC production will be made up within their ranks.
The framing of the new deal also allays Iran and Iraq’s concerns over appeasing US President Donald Trump’s concerns that oil prices were too high by framing it as a ‘return to 100% compliance’ rather than an official output boost. In practice, this should mean that since countries like Venezuela (and to a lesser extent Angola, Libya and Algeria) have been producing far less than their production quota due to various forms of disruptions, boosting them back up to agreed levels would achieve a natural gain of some 1 million b/d. The original deal brokered in November 2016 was for a cut 1.8 mmb/d, but disruptions in those countries have deepened it to 2.8 mmb/d over the past three months. Though there seems to be some disagreements between the Iranian and Saudi Arabian oil ministers, it seems that the pro-rata quota reallocations were not going to be strict since ‘some countries…. are not going to be able to produce’, allowing players like Saudi Arabia to step in to fill the gap.
The figures being bandied about are a one million barrel per day increase across OPEC and NOPEC, and a specific increase of 200,000 b/d for Russia within that figure. Saudi Arabia said it would increase output by ‘hundreds of thousands of barrels’ but exact figures would be decided later, implying a looser approach to the details and a focus on achieving the supply boost first and foremost. But more interestingly beyond the deal is the long-term implications of a cooperation entering its second year.
Both Saudi Arabia and Russia have been pushing for the creation of a new body, bringing together the 24 members of the OPEC and the NOPEC alliance under what is being called the OPEC+ umbrella. This would bring in countries like Malaysia, Oman, Bahrain, Kazakhstan and Mexico into a formal alliance with OPEC. For Russia, this is a sign of increased clout – given that the new body is said to give more voting power to large producers. For Saudi Arabia, it dilutes the influence of its rival Iran in world oil supply management, which has scuppered many deals in the past. A suggestion by Russia in Vienna that a ‘crude output deal’ for 2019 was already being planned implies that the creation of OPEC+ might be sooner rather than later. Saudi Arabia is said to already have offered to host talks for OPEC+ at home. The new body could prove to be as effective as OPEC has in the past; or it could fizzle out the way the Russia-led Gas Exporting Countries Forum has. Either way, the next six months in oil should be very interesting.
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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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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%)