Oil prices are up around $US9 a barrel since the idea of a big production cut by the OPEC+ group emerged last Friday with confirmation of earlier Reuters reports that a reduction of up to half a million barrels a day was being considered.
The price of US West Texas WTI crude ended last week around $US79.49. On Friday it was over $US88 a barrel as those initial reports hardened to a cut of half a million to a million barrels a day over the weekend, then one million, then ‘more’ than a million early this week.
That became the final decision – a cut of two million barrels a day which many analysts reckon is an actual cut of around a million barrels a day because so many OPEC+ members, including Russia, are failing to meet their daily production quotas.
OPEC+’s new production cuts, due to start in November, could therefore coincide with further falls in supply.
Years of under-investment across the industry means supply is still constrained and global spare production capacity “extremely low” and while some in OPEC claims this will encourage more investment, other, western analysts say that’s rubbish and all the cuts will do is allow the industry to continue to ride higher-than-expected prices until a western slowdown or recession sends demand and prices lower.
The OPEC+ decision is a sharp escalation in the oil fight between the US and the Saudis and if the US really throws a tantrum, it could support the so-called NOPEC legislation in Congress which, if passed (it had only been signed off by a Senate Committee), would see OPEC+ members exposed to the full weight of US anti-trust laws, most notably the draconian Sherman Anti-Trust Act which was used 111 years ago to break “Big Oil” in the US (ie the Standard Oil Trust, the forerunner of Exxon).
Taking on OPEC+ wouldn’t be so easy, but every member has assets in the US and they would be attacked under the legislation. It would make travel to and from the US by politicians and others from these countries, especially the Saudis, very problematic.
It would make life very tough for Saudi Aramco, the Saudi’s state-owned oil company which has an increasing global presence. The NOPEC legislation would seek to curtail that expansion.
The Biden Administration has also been discussing potential limits on fuel exports in an attempt to build domestic stocks of petrol and diesel as well as more releases from its reserves – a 10-million-barrel release is planned for November.
But for the moment, the advantage lies with the Saudi-Russian collusion in OPEC+
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What, then, does this mean for the oil and gas sector with the third quarter earnings season coming up?
This week we got two timely updates from global majors Exxon and Shell – and both could not have been more different.
Exxon was upbeat, especially about gas and its prospects in the US with suggestions it could report a near record quarterly result. Shell, by contrast, was gloomy with its update strongly hinting that its run of record profits will end with the September quarter report later this month.
Shell’s update this week said lower refining and chemicals margins and weaker gas trading had weighed on third quarter earnings.
After reporting consecutive quarterly profit records in the first half of the year as the disruption in energy markets from Russia’s February invasion of Ukraine drove up prices for fossil fuels, the company is now suffering from the price drop (that the OPEC+ cut is seeking to reverse).
Global oil prices have dropped from more than $US120 a barrel in June to less than $US80 a barrel in late September. They have since risen back towards $US90 a barrel.
In the three months to the end of September, Shell said this week that margins in its refining business were expected to be $US15 a barrel, almost half the $US28 a barrel in the June quarter.
Shell said this would have a “negative impact of between $1bn and $1.4bn” on third-quarter adjusted earnings before interest, tax, depreciation and amortisation compared with the three months to June
At the same time, profit margins in its chemicals unit have collapsed from $US86 a tonne in the last quarter to an expected minus $US27 tonne, after a fall in global demand for plastics.
Shell, the world’s biggest trader of liquefied natural gas, added that earnings from its integrated gas business were expected to be “significantly lower” than in the second quarter because of lower seasonal demand and the impact of a “volatile and dislocated” market.
The second quarter’s record profit prompted Shell to launch a $US6 billion share buyback that will be useful now the outlook has become more uncertain.
Shell announced in September that Wael Sawan, head of gas and renewables, would replace Ben van Beurden as chief executive at the end of the year, so a major headache ahead for the many who is expected to take the oil major deeper into renewables.
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But it was a very different story two days earlier, with Exxon Mobil Corp signalling expectations for a strong third quarter operating profit on the heels of the second quarter’s all-time record earnings.
Exxon said the driver would be strong earnings from its natural gas business which offset weaker refining and chemicals (which hurt Shell).
Analysts reckon the update showed Exxon’s operating results could end up near its $US17.9 billion second quarter record.
In the third quarter, US natural gas prices averaged $US8.47 a million British thermal units, up from $US7.17 mmBtu in the second quarter. Brent crude prices though eased to $US98 per barrel in the same period, from an average of $US109 in the June quarter.
In a breakdown of individual business units, Exxon indicated natural gas boosted operating results by about $US2 billion, offsetting an about $US1.6 billion decline in oil profits.
Earnings from pumping oil and gas could reach about $US13 billion, compared to market forecasts for a $US10.1 billion operating profit.
Weak refining margins cut profits from selling petrol and diesel by about $US2.6 billion, offset by lower maintenance costs and an additional business day during the quarter.
Operating profit could fall to about $US3.4 billion from $US5.3 billion in the second quarter, the SEC filing indicated.
Chemical results also will slip by about $US300 million from the prior period’s $US1.07 billion operating profit, and motor oil results will double to about $US800 million, offsetting the chemicals drop.
Overall, a tally of changes listed in Exxon’s filing show an operating profit of about $US17.8 billion, well above market forecasts of a $US14.68 billion and closer to that all time high of $US17.9 billion than most of Wall Street had suspected until the update landed.
