Two big bearish influences have yanked Brent and WTI down by $5-6/barrel from their 42-month peaks, but may be overturned by a supply shock as we approach the fourth quarter of this year. The price slide was triggered by a substantial boost in Saudi production in June and reinforced this week by reports of a rising tide in July not only from the kingdom, but joined by growing flows from Iraq, Kuwait, UAE, Algeria, Russia and Brazil. The countries are pumping at their highest levels since end-2016.
Within OPEC, the hikes more than offset the declines from Venezuela, Iran and Libya, to produce a net increase of around 340,000 b/d in July compared with June.
Incremental supply resulting from the OPEC/non-OPEC ministers’ agreement for a 1 million b/d boost in Vienna on June 23, meant to calm Brent down from the $80/barrel mark that had rattled several producer countries, may have come too soon.
Much would depend on how the second factor weighing on crude prices — mounting trade conflict between the US and China — pans out. Tensions spiked this week after the US said it was considering raising the proposed import tariff rate on $200 billion worth of goods from China from 10% to 25%.
China said it would have to retaliate “to defend the nation’s dignity”. The country might be running out of ammunition, though, as it buys much less from the US than what it sells to that country — an annual trade deficit of around $370 billion, which is at the heart of Donald Trump’s crusade.
China might compensate for that lack of leverage by continuing to shun US crude imports and rejecting Washington’s demands to curtail its business with Iran. And it might let the yuan depreciate against the US dollar, which makes Chinese exports more competitive, while discouraging imports, as they become relatively costlier.
The yuan has slumped by around 8.8% against the dollar since mid-April, accelerating its fall in recent weeks. The first round of tit-for-tat tariffs by the US and China on $34 billion worth of imports went into effect on July 6.
Data this week showed Chinese manufacturing activity grew at its slowest pace in eight months in July as new export orders contracted for the fourth month in a row, a fallout of the bitter trade dispute with the US. The full impact on China’s economy is not expected to be felt until early 2019. But it has begun to weigh on an oil market predisposed to bearishness due to the additional barrels flowing from the OPEC/non-OPEC producers who had been curtailing output since January 2017.
Fears of the trade war dampening Chinese oil demand — the second-largest in the world after the US — come on top of two successive monthly contractions in China’s crude imports, which saw June purchase volumes shrinking to the lowest level since December 2017. A marked slowdown in the appetite of the country’s independent refiners or so-called “teapots”, which have slashed operating rates due to shrinking margins after the government plugged some tax loopholes in March, is expected to sustain. These refiners hold 25-30% of China’s 15 million b/d refining capacity.
Meanwhile, US President Donald Trump this week dangled an ad hoc offer through the press to meet the Iranian leaders without pre-conditions, to which Secretary of State Mike Pompeo promptly added a list of conditions. Tehran, as expected, scoffed at the proposal. While the Iran-backed Houthi rebels in Yemen declared a two-week halt to attacking ships passing through the Bab el-Mandeb strait linked the Red Sea with the Arabian Sea after targeting two Saudi oil tankers in the choke point last week, Iran decided to flex its muscles by launching naval exercises in the Persian Gulf.
With the first round of US sanctions targeting Iran’s automobiles, gold and currency due to take effect on Monday (August 6), the Iranian rial has gone into a tailspin and there are reports of public protests erupting across the country again.
The oil market may remain complacent for a few more weeks. But it may be in for a rude shock once US sanctions against Iran’s oil sector begin to bite.
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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%)