Oil firms ride high but sector braces for more ‘realistic’ prices

Aramco

• Prices surged on the back of Russia’s invasion of Ukraine 
• Aramco reported a 90% year-on-year increase to $18.8bn
• Shell posted record earnings of $11.4bn, BP tripled profits to $8.5bn
• Prices could soften with global economic slowdown

The Middle East’s oil and gas sector will remain buoyant into 2023, even as global oil prices become more “realistic” after surpassing a 15-year high of $123 per barrel in March, according to analysts. 

Oil prices hovered just below $90 per barrel on Tuesday, having gradually come down from $100/barrel at the end of July to reach near-six month lows.  

“Regional investment in oil and gas will almost certainly continue for the foreseeable future, because under-investment in global crude supplies over the past five to eight years has resulted in a supply crunch that goes far beyond the Russia-Ukraine situation,” said James Thomas, a partner specialising in the oil and gas industry at consultancy Strategy& Middle East. 

• Saudi Aramco Q2 profits soar 90% on higher oil prices
• UAE’s operating surplus doubles due thanks to oil price surge

This means there’s an opportunity for Middle East national oil companies (NOCs) to invest to increase their share of global supply, Thomas said.

“Being some of the lowest-cost producers in the world, regional NOCs’ margins will likely continue to be strong going forward, which is positive for investors and suppliers to the sector.”  

High oil prices, which surged on the back of Russia’s invasion of Ukraine in February and a subsequent embargo on Russian crude, helped push second-quarter profits at the world’s biggest oil companies to record highs. 

This month, Shell posted record earnings of $11.4 billion for the three-month period from April to June, and BP said it tripled its profits for the same period to $8.5 billion – the second highest quarterly profit in the company’s history after it posted $8.8 billion in 2008.

Good news for diversification

In the Arabian Gulf, the Saudi Arabian Oil Company, better known as Aramco, also set a new quarterly earnings record since its initial public offering in 2019.

The energy giant reported a 90 percent year-on-year increase in net income and declared a dividend of $18.8 billion to be paid in the third quarter.

It cited higher crude oil prices and volumes sold, and higher refining margins as the drivers behind its strong performance. 

Aramco’s earnings statement – and those from BP, Shell and others – is good news for investors in the region’s oil and gas sector, and for overall economic diversification efforts by GCC governments, said Robin Mills, founder of Dubai-based Qamar Energy.  

“The region’s oil story is very positive right now – refining margins have been exceptionally strong, and, for Saudi Arabia, Aramco’s record earnings mean increased government revenues and more money to be spent on Vision 2030 economic goals,” he said. 

“The challenge will be how to spend it productively – perhaps on an easing off of VAT or on mega projects such as Neom.  

“The region’s other major oil-producing nations, like Abu Dhabi and Kuwait, follow a similar pattern – that of strong production and growth for the foreseeable future.” 

But analysts warned that factors such as global economic slowdown, and the prospect of Iranian crude returning to the market if an expected nuclear deal agreement is reached, could cause global oil prices to soften in the coming months, with an impact on NOCs next quarterly results.

“Prices have already fallen a bit because not as much Russian crude was lost from the market as everyone expected, while recessionary fears could cause demand to drop and there could be further supply disruption if there is an outright ban on Russian oil or perhaps a price cut,” said Mills.  

“Iran is also an issue, because if a deal is reached and Iranian oil comes back, this would ease the market and prices would fall.

“The large oil companies’ Q3 results will probably be weaker than in Q2 but still strong, and what will happen in Q4 is less certain.” 

Oil prices hovered just below $90 per barrel on Tuesday 16 August, having gradually come down from $100/barrel at the end of July to reach near-six month lows.   

Energy economist Dr Carole Nakhle, founder and chief executive of consultancy Crystal Energy, agreed that, globally, Q3 earnings will reflect the current softening of prices but that the Middle East’s oil and gas sector would remain in good shape.

“The fears of oil reaching $150-$300/barrel have not materialised, simply because the world did not lose the expected millions of barrels from the Ukraine crisis,” she said.  

“The prices we are seeing now are therefore far more realistic and third-quarter earnings will reflect this softer stance, but they will still be high. Demand for regional output remains strong and high production levels are set to continue into 2023.  

“We could still see oil price spikes based on recessionary fears and geopolitical issues,” she added.  

Healthy growth

Opec’s monthly oil report for July said the group revised downwards world oil demand growth but said it “still shows healthy growth of 3.1 million barrels a day”. 

Global oil market fundamentals “continued their strong recovery to pre-Covid levels for most of the first half of 2022, albeit signs of slowing growth in the world economy and oil demand have emerged,” the report added.  

The focus for Gulf oil-producing nations will be on using the revenues from higher oil prices to continue to invest in their non-oil economic growth strategies and the low-carbon agenda, noted Strategy&’s Thomas.  

“I don’t think oil is necessarily ‘king’, but the world needs a reliable, affordable energy supply to power its economy while lower-carbon alternatives are being ramped up,” he said.

“Not only is Middle East oil lower cost, it’s also relatively lower carbon intensity. So the low carbon agenda will – and must – continue. But right now, we still need hydrocarbons. 

“Of course, higher oil prices mean more government revenues for Gulf states, not just Saudi Arabia, which helps balance budgets and enable investment in domestic infrastructure, including decarbonisation efforts.”