Oil Majors Show Weak Profits As Oil Prices Rise

Shell and TotalEnergies have reported a steep drop in second-quarter profits, as oil and gas prices fell from record highs reached following Russia’s full-scale invasion of Ukraine 17 months ago.

The sharp decline in earnings from two of the world’s biggest oil companies signals the end of a run of record-setting results for energy companies.

Shell, Europe’s largest oil company by revenue, reported adjusted earnings of $5.1 billion during the April-to-June period — less than half the $11.5 billion it reported a year ago. The result was also driven by lower production volumes and lower margins in its oil refining business, Shell said in a statement Thursday. The company’s stock fell 2 percent in London.

Shell's adjusted earnings of $5.073 billion missed company-provided analyst forecasts of $5.8 billion.

French oil company TotalEnergies posted a 49% drop in second-quarter net income, reflecting lower natural gas prices and slimmer refining margins in Europe as energy markets calm.

Adjusted net income fell to $5 billion compared with $6.5 billion in the first quarter, and $9.8 billion during the same period last year while analysts had expected $5.2 billion in net income

Other energy companies have also reported declining income. Chevron, the second-largest American oil company, said on Sunday that its second-quarter income was $6 billion, down from $6.6 billion in the first quarter and nearly a 50 percent decline from a $11.6 billion profit in the second quarter of last year

Exxon’s revenue declined to $82.9 billion from $115.7 billion a year earlier. The company reported earnings per share of $1.94, compared with $4.21 in the second quarter last year.

Corporate profits have been cited as a contributor to rapid inflation since the start of the Covid-19 pandemic, and oil companies have been accused of unnecessarily raising their prices without ramping up production, harming consumers. Darren Woods, the Exxon chief executive, responded before a House committee that “no single company,” but rather the market, established prices based on supply and demand.

And indeed, supply and demand are driving prices higher. In the past few weeks, global oil demand has surpassed the monthly peak set in 2019 before the COVID-19 pandemic. Expressed in barrels a day, the fresh record high in global oil consumption totals about 102.5 million, likely hit in the last few weeks in July and above the 102.3 million of August 2019.

The International Energy Agency, which compiles benchmark supply and demand statistics, has anticipated this rise for months. “World oil demand will climb by 2 mb/d in 2023 to a record 101.9 mb/d. Reflecting the widening disparity between regions, non-OECD countries, buoyed by a resurgent China, will account for 90% of growth,” they projected.

Data for the January-to-April period provides valuable insights into the global oil demand, averaging 100.8 million barrels a day during this time frame. Remarkably, this figure surpasses the same period in 2019, which saw an average of 99.9 million barrels per day, as per calculations based on monthly data from the IEA.

Interestingly, gasoline, a fuel previously deemed vulnerable due to the rise of electric vehicles, is now playing a key role in boosting demand. Contrary to previous predictions, gasoline consumption appears likely to, at the very least, match pre-pandemic levels.

Three factors contribute to gasoline's unexpected resurgence: the continued increase in the absolute number of gasoline-powered cars, longer vehicle ownership, delaying the adoption of newer and more fuel-efficient models, and the shift in Europe towards gasoline cars, as consumers replace diesel vehicles. Despite some calling the recent surge in gasoline consumption a "swan song," it seems premature to dismiss the fuel's relevance.

Regardless of the trajectory of the automotive industry, current trends indicate that global oil demand will likely experience a further 3% to 4% increase over the next five years, before leveling off at a high plateau.

Chinese Demand Impacts More Than Oil

An additional report by the IEA coal consumption in 2022 rose by 3.3% to 8.3 billion tonnes, setting a new record. This year, coal demand will inch up by 0.4% year-on-year, to 8.388 billion tons, due to continued growth in industrial coal use which would offset an expected small decline in coal-fired power generation.

The EU and the United States are leading the declines in coal use in the power sector, but Asia, especially China and India, more than offset these declines.

In China, the top global coal consumer, demand jumped by 5.5% in the first half of 2023 compared to the same period last year, due to very low hydro output so far this year

So far this year, China has relied heavily on coal to offset a large decrease in hydropower generation. During the first half of this year, coal production, coal imports, and coal-fired electricity generation jumped and offset a significant decline in power output at China’s massive hydropower capacity due to insufficient rainfall and drought.

Top officials are meeting with power firms and the state grid operator to stress the importance of keeping power on during the summer when China also hopes to see its economy rebounding from the lower-than-expected growth in the second quarter.

The IEA sees China’s coal demand rising by about 3.5% in 2023, with demand from the power sector up 4.5% and demand from non-power uses growing by 2%. In India, the total increase in coal demand is expected at 5% annually this year.

Clean energy growth has put coal use into structural decline in Europe and the U.S., IEA Director of Energy Markets and Security Keisuke Sadamori said.

“But demand remains stubbornly high in Asia, even as many of those economies have significantly ramped up renewable energy sources.

OPEC At Fault?

OPEC has cut oil production significantly in the last 12 months in a prolonged effort to raise prices despite their 2022 highs. The biggest price cuts came in the fall, when fears of a recession drove them down.

“The OPEC and Non-OPEC Ministerial Meeting noted the adverse impact of volatility and the decline in liquidity on the current oil market and the need to support the market’s stability and its efficient functioning,” the group said last September.

Now, Saudi Arabia is expected to extend a voluntary oil output cut of 1 million barrels per day (bpd) for another month to include September. Saudi output fell by 860,000 barrels per day (bpd) in July, while total production from the Organization of Petroleum Exporting Countries was 840,000 bpd lower, a Reuters survey found on Monday.

"Crude prices are finishing a solid month on a high note as demand prospects remain impressive and no one doubts that OPEC+ will keep this market tight," OANDA analyst Edward Moya said.

Goldman Sachs estimated that global oil demand rose to a record 102.8 million bpd in July and it revised up 2023 demand by about 550,000 bpd on stronger economic growth estimates in India and the U.S., offsetting a downgrade for China's consumption.

However, demand from hedge funds may be artificially elevating prices. Fund managers had purchased a total of 229 million barrels over the four weeks since June 27, according to reports filed with the U.S. Commodity Futures Trading Commission and ICE Futures Europe.

Most of the buying was in contracts linked to crude oil (+169 million barrels) with a particular emphasis on NYMEX and ICE WTI (+132 million).

Fund managers have become increasingly optimistic about fuel prices given that inventories remain well below normal despite the industrial recession in North America, Europe and China over the last 6-9 months.