Oil majors are poised to post a record combined profit of $50 billion in the second quarter, although the industry’s stellar performance may be setting the stage for its own decline.
As Bloomberg comments, the rise in “Big Oil” profits is a direct result of high energy prices that are fueling rampant inflation, piling pressure on consumers, raising the risk of recession and raising calls for a tax on excess profits.
According to the agency, amid political and economic turmoil, shareholders of major oil companies may have to temper their expectations of ever-increasing returns.
In particular, Exxon Mobil, Chevron, Shell, TotalEnergies and BP are expected to record bigger profits than in 2008, when international oil prices had soared to a record high of $147 a barrel.
Which comes as it wasn’t just crude that saw the price soar due to the crisis over Russia’s invasion of Ukraine, but at the same time natural gas prices and refining margins also hit records.
After all, many major markets have been faced with a critical reduction in refining capacity due to a combination of reasons, from lockdowns and the disruption of investment due to the pandemic, to sanctions on Russia and China’s decision to limit oil exports.
Notably, the 3-2-1 spread (3 crude futures to 2 gasoline and 1 diesel) in the US Gulf, a rough measure of margins on refining a barrel of crude, jumped to $48.84 on average the second quarter, having more than doubled from a year earlier.
A similar measure in Europe – TotalEnergies’ variable cost margin – tripled to $145.70.
According to the US Energy Administration, EIA, refining now accounts for 26% of the cost of each gallon of gasoline in the country, up from 14% on average over the previous decade.
In this context Shell expects a profit of 1 billion dollars in refining. And Exxon, which has the largest divestiture footprint of the Big Oils, is expected to post more profit in the second quarter than it has in the previous nine combined, according to estimates compiled by Bloomberg.
These “flattening” refining margins likely won’t last, says Matt Murphy, analyst at Tudor Pickering Holt & Co. High fuel prices, combined with a broader increase in the cost of living, are hurting consumers. “Gasoline demand is underperforming forecasts, we’re seeing a degree of demand destruction,” he points out.
As a result, companies in the sector are moving conservatively despite their explosive earnings. Exxon will likely use the excess cash to reduce its debt, according to analysts at Citigroup. Chevron may raise the floor of its share buyback range to $10 billion for the year, they added.
The excess profits are not just the result of a broad rise in commodity prices. At the same time, major oil companies are spending much less than they were the last time oil was over $100 a barrel. Their capital spending is forecast at $80 billion this year, about half the 2013 level.
“Costs have been on a long, downward trend since 2014,” said Paul Cheng, an analyst at Scotiabank. “With commodity prices being so good, it’s the perfect combination.”
Which is not necessarily shared by political leaders like Joe Biden, who are struggling to curb runaway inflation and greatly reduce energy costs for consumers.
As Bloomberg points out, their calls to the oil and gas industry to boost domestic production have met with little response. Oil executives are wary of knowing how long high prices will last, while avoiding committing to major fossil fuel projects that may become redundant as the world transitions to cleaner forms of energy.
However, the situation carries the risk of political reactions. The UK earlier this month imposed a tax on oil and gas profits. Italy has voted for a tax on the energy industry, while in France some MPs support the idea of ​​a special tax of up to 3 billion euros. President Emmanuel Macron has so far resisted such calls and instead urged companies, including TotalEnergies, to extend discounts on fuel purchases.
In the US, Biden criticized Exxon for making “more money than God” and accused other oil companies of taking advantage of high gas prices, but there has been no serious political push for an emergency tax on excess profits in hours.
So, according to Bloomberg, against this tumultuous backdrop, the most profitable quarter in the history of oil majors may not be cause for celebration.
“Most companies this quarter are going to without a doubt report record earnings,” said Scotiabank’s Cheng. “But with the possibility of a severe recession and memories of 2020, I expect boards to be conservative.”
Source: Capital
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