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Next Week Is as Good as It Gets for Big Oil

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ByRakteem Katakey and Joe Carroll: 22 July 2016

  • Several majors expected to post highest earnings in 3 quarters

  • Strong performance may not last as oil seen easing back to $40

For oil companies, the second quarter might be as good as it gets.

Shares gained more than in any other industry, thanks to crude rising from a 12-year low. Profits were the best in at least three quarters for majors including Royal Dutch Shell Plc, Chevron Corp. and BP Plc, helped by cost cuts, analysts say. The rest of the year might not be as rosy as supply holds near record levels.

The combined market value of the world’s oil companies shrank by $2 trillion in the past two years following crude’s collapse. While analysts agree the worst of the oversupply is over, BNP Paribas SA and JBC Energy GmbH are among those forecasting a slide back to $40 a barrel as output rebounds in Canada, Iran, Nigeria and the U.S., hurting producers whose investment cuts have put future growth in doubt.

“The oil market has still to absorb higher supply from the return of disrupted production,” Giovanni Staunovo, an analyst at UBS Group AG in Zurich, said Thursday. “Oil prices could fall to $40 again.”

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West Texas Intermediate crude averaged $45.64 a barrel last quarter and Brent $47.03, recovering from less than $28 for both grades earlier in the year. The 89-member MSCI World Energy Index, led by Exxon Mobil Corp., Chevron and Shell, rose 9.7 percent in the three-month period. It beat the 5.2 percent advance of the next strongest sector, health care, and the 0.3 percent gain of the MSCI World Index.

The last time the energy index surpassed every other sector was in the second quarter of 2014, just when oil’s slump was starting. Six months later, the index turned out to be the worst performer of the year. Brent is down 7 percent this month and WTI 7.8 percent.

“The road ahead is far from smooth,” the International Energy Agency cautioned July 13 as it said bloated stockpiles will continue to damp oil prices. Inventories of crude and refined products in the U.S., the biggest oil consumer, swelled to a record 1.385 billion barrels last week, data from the Energy Information Administration show.

For a wrap of analyst oil-price predictions, click here.

BP will be the first of the five biggest non-state oil majors to announce second-quarter earnings on July 26. Analysts surveyed by Bloomberg estimate the company will post adjusted net income of $822 million, 37 percent lower than a year earlier but the highest in three quarters. Its results are likely to indicate how the others will perform.

Shell is expected to report adjusted profit of $2.24 billion on July 28, according to the average of nine estimates. That would be the highest since the second quarter of 2015. Total SA will also publish results July 28, and Exxon and Chevron the following day.

Part of the reason for the quarter-on-quarter gains is improved refining margins. While oil’s lows led to losses at BP’s exploration and production business in the past two quarters, they’ve driven up earnings for its refineries, which benefit from cheaper crude. Global refining margins averaged $13.80 a barrel in the quarter through June compared with $10.50 in the preceding three months, according to the company’s website.

Those margins are now starting to contract, averaging $11.40 so far this month. Refiners that ran their plants at full capacity earlier this year made more gasoline than needed. There’s now such a glut that at least five tankers hauling the fuel to New York were turned away in the past month, according to ship-tracking data compiled by Bloomberg.

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“The more you build product inventories that are not absorbed by demand, the

greater the pressure will be on refining margins and thus crude-oil demand,” said Harry Tchilinguirian, head of commodities research at BNP Paribas SA in London. “Fundamental downward pressure on oil is not yet lifted.”

Chevron probably will post quarterly net income of $514.2 million, based on the average estimate from 12 analysts. While that’s 9.9 percent lower than a year earlier, it compares with losses in the prior two quarters.

Exxon’s profit probably declined 38 percent from a year earlier to $2.6 billion, 12 analyst estimates show. Earnings may have gained 44 percent from the previous quarter but were down 6.5 percent from two periods ago.

Major oil companies still enjoy the benefit of growing demand for their crude. World oil consumption will rise to 100.5 million barrels a day in 2020, up 6.5 percent from last year, the IEA said in February. Yet belt-tightening across the industry in the past two years — including project cancellations and thousands of job cuts — may limit their ability to exploit this expanding market.

Oil and gas companies will slash $1 trillion from planned spending on exploration and development from 2015 to 2020, slowing growth in production, according to consulting firm Wood Mackenzie Ltd.

Swings in the oil price mean it’s still difficult for energy companies to plan for the future, according to Shell Chief Executive Officer Ben Van Beurden, who predicts volatility will persist for the next few years. 

“If we get to a point where we do not see a better recovery of the oil prices, therefore a better balance in our finances, we will be very much minded to defer projects,” he said earlier this month in London.

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