The world’s oil giants are expected to reap huge profits in the second quarter of this year, but this outstanding performance can also be a bad omen for themselves in the future.
Huge profits

Exxon Mobil, Chevron, Shell, TotalEnergies and BP are expected to report record profits of $50 billion in the second quarter of this year. This figure is even higher than the profit in 2008, when crude oil price hit $147/barrel.

This is a direct result of the jump in energy prices over the past year. Not only did crude oil prices increase sharply after the Russia-Ukraine war broke out, but gas prices and profit margins of refineries also simultaneously broke records.

However, the explosive increase in energy prices is one of the causes of inflation, thereby putting pressure on consumers, increasing the risk of recession and encouraging lawmakers to tax the industry. oil industry.

Mr. Ahmed Ben Salem, an analyst at Oddo BHF, said: “There is a high probability that the profits of oil companies will peak in the second or third quarter of this year, and then decline slightly. The recession is lurking, we can calm things down.”

Many major markets are suffering from a serious shortage of refining capacity due to a series of plant shutdowns, investment delays due to the pandemic, Western sanctions on Russia and China’s decision to limit exports. petroleum exports.

In the US, a rough measure of profit margins from refining a barrel of crude spiked to an average of $48.84 in the second quarter – more than twice as high as a year ago. A similar measure in Europe tripled to $145.7.

Refining now accounts for 26% of the cost of a gallon of gasoline in the United States, nearly doubling from an average of 14% a decade ago, according to the Energy Information Administration (EIA). Shell is expected to earn $1 billion from its refining business, and Bloomberg estimates Exxon will earn more in the second quarter than in the previous nine quarters combined.

However, Matt Murphy, an analyst at investment bank Tudor Pickering Holt, said that “attractive” profit margins from the refining business probably won’t last long.

Expensive fuel prices, along with the rising overall cost of living, are taking a toll on consumers. “Gasoline demand is falling behind forecasts, we see demand being destroyed to some extent,” Mr. Murphy emphasized.

Remain cautious

Therefore, energy corporations are said to be quite cautious despite sublimating profits. Citigroup analysts said that Exxon will likely use excess cash to reduce debt, while Chevron may increase share buybacks to $10 billion this year.

The sky-high profits are not just the result of widespread commodity price increases. The global oil giants are also spending less than last time, when oil prices were above $100 a barrel. Capital spending by this group is forecast to reach $80 billion in 2022, but that’s only half of what it was in 2013.

Scotiabank analyst Paul Cheng said: “Expenditure by energy companies has been on a downward trend for a long time since 2014. Coupled with the current bounce in commodity prices, this is the perfect match for these companies.”

But political leaders like US President Joe Biden may be unhappy. They have called on the oil and gas industry to increase domestic production, but with little success.

Mr. Biden has once bluntly criticized Exxon for “making money more than God” and accused other oil companies of taking advantage of soaring gasoline prices to profit. Lawmakers are urging the Biden administration to tax the oil sector to offset the damage to consumers.

Meanwhile, business leaders are cautious because they don’t know how long this high energy price will last, and they are also apprehensive about committing to the inherently large fossil fuel projects. may become redundant as the world transitions to clean energy.

On the other hand, the global oil giants cannot keep capital spending low for long, because costs need to rise due to inflationary pressures swelling across the economy.

Schlumberger NV, the world’s largest oilfield service provider, said last week that sales were up nearly 20% from a year ago. Schlumberger found that demand for the company’s services from oil corporations was in a “multi-year bullish cycle”.

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