Barely had Saudi Arabia and Russia managed to rein in crude’s rally with a hard-earned OPEC/non-OPEC deal to increase output by up to 1 million b/d, that US President Donald Trump upped the ante again.
The US would press its allies to cut their crude imports from Iran to zero by November 4 (when US sanctions against Iran’s oil sector take effect), a senior State Department official told reporters in a “background briefing” in Washington on June 26, bringing crude bulls back into play.
Though there was some back-pedalling by US officials subsequently, the market was left rattled, once again. The surprising US declaration raised fears that the few OPEC/non-OPEC producers that do have meaningful spare capacity, would run out of steam if called upon to compensate, in theory, 2.4 million b/d of Iranian crude disappearing from the market.
The suggestion that the US was not inclined to waive sanctions against buyers in exchange for them paring their purchase of Iranian crude, as it did during the 2012-2015 sanctions era, prompted the market to factor in a much bigger potential loss of Iranian barrels than the 0.5-1.0 million b/d range estimated in recent weeks.
The June 26 State Department posturing could turn out to be a classic bargaining tactic — get an upper hand by starting out with an extreme demand — as the US dispatches its envoys to Iran’s crude customers China, India and Turkey.
A State Department official Thursday softened the original message, saying that the US was “prepared to work with the countries that are reducing their imports on a case-by-case basis.”
Comments on the same day by Nikki Haley, US ambassador to the UN on a visit to India, also suggested a moderation in stance. In an interview with a local TV channel, Haley acknowledged that India “can’t change its relationship with Iran in a day,” but nonetheless, said the US was encouraging it to re-evaluate that relationship.
Discussions between the US and China over Iran sanctions are bound to be more complicated, given that the two economic powers are locked in an increasingly fierce trade battle, having announced tit-for-tat import tariffs against each other. Besides, Beijing continues to stand by the 2015 Iran nuclear deal as one of its signatories.
China has another lever to pull — its substantial and rising purchases of US crude. The country, which is now neck and neck with Canada as the largest importer of US crude, has threatened a 25% import tariff on the product. That would effectively stem the flow of US crude into China by making it economically unviable.
Russia is also under US sanctions, but both China and India have continued their trade relations with that country.
While neither Chinese nor Indian refiners would want to risk secondary US sanctions, the Iran crude imports issue could get stuck in protracted diplomatic wrangling. That would keep the oil market on tenterhooks and the Iran fear premium intact in crude prices through the third quarter.
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Market Watch
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
1. ExxonMobil:
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
2. Shell:
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
3. Chevron:
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
4. BP:
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
5. Total:
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)