In Depth

Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

Oil price: BP and Shell will see profits halve

26 October

Two of Britain's largest companies, both of them major players on the world stage, are expected to report this week that their profits have halved over the past year.

Against a painful background of tumbling oil prices, revenues from core exploration activities have been falling across the sector with companies forced to cut billions of pounds from their capital spending to protect their payouts to investors. A recent Financial Times article also highlighted the increased efforts on the part of the oil majors' powerful trading divisions which can bet against prices in order to profit from the slump and partially offset the current decline in production.

In spite of their best efforts to reverse the decline, BP and Shell will still report a bigger than expected hit in the third quarter. The Daily Mail says BP will post a 60 per cent fall in earnings from £2bn last year to £800m, while Shell will reveal a drop from £3.5bn to £1.7bn.

Both companies have been hit by significant one-off costs. In Shell's case this is directly related to the wider global slowdown. The oil giant is taking a substantial write-down in value against its multi-billion pound Arctic drilling venture, which was the latest investment project to be cancelled last month after a test well produced poor results.

BP's poor return is in part affected by increased provisions for fines, after it agreed a $12.4bn (£8bn) to the US authorities to settle claims relating to the 2010 Deepwater Horizon oil spill.

The results are the latest evidence of the devastating effects on the oil sector of the ongoing price slump, which set in last summer and is being fuelled by persistent global oversupply. International benchmark Brent crude is currently rooted at around $48 a barrel – well below profitable levels for production – with analysts speculating that a global economic slowdown could hamper demand and prevent the market from rebalancing.

The Wall Street Journal says Maersk Oil, a division of the Norwegian conglomerate A/P Moller-Maersk, has revealed it will cut 10 to 12 per cent of its 4,500 workforce as it prepares for a significant drop in profits by the end of the year. Around 220 jobs in the UK are set to go.

Tax take from North Sea oil sector turns negative for the first time

22 October

According to figures from HM Customs and Revenue, UK taxpayers effectively paid out millions of pounds to prop up the industry over the six months to September, as corporation and petroleum tax receipts were outweighed by subsidies offered to incentivise investment.

The upshot is that tax revenues for the UK government from the North Sea sector are negative for the first time ever, revealing the wider impact of the ongoing oil price slump.

This compares to a peak quarterly corporation tax take of £3.3bn in 2011 and high watermarks for petroleum taxes of £580m in a single month, The Guardian notes. This year, the Treasury may struggle to meet its target for net tax revenues of £700m.

The figures also highlight the fiscal problems that might have faced an independent Scotland if nationalists had won the referendum last year. The Scottish National Party had said "North Sea oil would help fund independence" and had predicted revenues of £7.9bn in 2016/17 alone.

These estimates were based on an oil price of $113 dollars a barrel, around the level prior to the severe slide that set in in last June. International benchmark Brent crude has been stuck at around or below $50 a barrel for much of the summer. When prices plunge this low, oil is loss making for most producers.

Crude oil prices fell again yesterday after the US energy watchdog announced that domestic stockpiles had risen by a surprisingly high eight million barrels last week. Brent was trading marginally above $48 a barrel in London this morning.

There were hopes that a meeting yesterday between members of the 12-nation Opec cartel and other major exporters such as Russia might yield concessions on Opec's currently high oil output, with Venezuela's president calling for controls in order to bring in a price floor of $88 a barrel.

Nevertheless, there appears to be little appetite for changing a policy designed to protect its market share. The BBC says neither the Venezuelan government – nor anyone else at the moment – is "counting on an oil price rise anytime soon". 

Oil price slump leaves Gulf state budgets in tatters

21 October

The oil price has fallen again in recent days, as data continues to undermine the case for a substantial rebalancing of supply in the market.

International benchmark Brent crude fell back below $49 a barrel yesterday and is hovering closer to $48 today, well below the levels needed to make most production profitable. The US benchmark West Texas Intermediate is rooted below $46 a barrel.

The Wall Street Journal says the latest decline comes ahead of data set to be published later today by the US energy watchdog. This is expected to show crude oil inventories rising by as much as seven million barrels a day. Despite signs that domestic output is falling in the US, the rise continues to undermine any sense that global oversupply is reversing fast enough to bring about significantly higher prices.

The market remains sceptical that a meeting of representatives from states within the 12-nation Opec oil cartel and other major producers such as Russia will lead to any real decrease in production. The current overhang of around one million barrels a day is largely thought to be caused by Opec, which has stubbornly held its own daily output above 30 million barrels.

Recent output indicators have shown no sign of movement from the likes of Saudi Arabia, the de facto leader of Opec, even as US shale production slows. This is despite mounting evidence that lower revenues on oil are hurting economies that are dependent on exports of the commodity, including many members of the cartel.

The International Monetary Fund (IMF) published a report on Tuesday that showed budget deficits for Gulf states widening, the Financial Times reports. The six-member Gulf Co-operation Council will see economic growth slow from 3.25 per cent this year to 2.75 per cent next year, with average budget deficits expected to reach 13 per cent. Saudi Arabia faces a deficit of close to 22 per cent this year.

At a recent press conference in Dubai, Masood Ahmed, the IMF's regional director, said that while these Gulf states have large fiscal 'buffers', the widening budget deficits need to be urgently addressed with spending cuts brought in without delay. 

Oil price slump to cost another 11,000 North Sea jobs

19 October

The pain caused by the prolonged slump in oil prices is only just starting to be felt as industry insiders predict that as many as 11,000 more jobs are likely to be lost in the North Sea.

Some 5,500 jobs have already gone from the sector, which "is the most expensive place in the world to extract oil… thanks to high staff costs and declining reserves", according to the Financial Times. But "experts warn the worst is yet to come", with the chief executives of two of the largest independent producers, EnQuest and Premier Oil, predicting job cuts that amount to "three times that figure".

This means that since the start of the oil price decline, a total of 45 per cent of the workforce will eventually lose their jobs.A report earlier this summer from the trade body Oil and Gas UK revealed that it costs close to $50 a barrel just to get oil out of the ground in the North Sea (see below).

Brent crude, the international benchmark that defines North Sea prices, is currently rooted at $50 a barrel, around 60 per cent down on the summer of 2014. Most production is therefore operating at a significant loss.

The Edinburgh-based consultancy Wood Mackenzie now fears that 140 fields in the waters off north-east Scotland may be closed down over the next five years if oil prices remain so low, the Daily Telegraph reports.

The FT adds that the impact of the job cuts is being felt in Aberdeen, the Scottish city that acts as a hub for offshore oil companies and workers. "House price rises have stalled, while hotel room rates and taxi bookings are both falling," with some experts predicting "lasting damage" due to failure on the part of the city's leaders to put it "in a position to survive after oil".

Oil price: how oil companies are weathering the slump

16 October

Amid a sharp fall in the price of oil, the world's major oil and gas companies have been able to protect payouts to investors by using their powerful trading position to gain from low-cost crude oil.

A closely watched annual report on trading performance, published by the consultants Oliver Wyman, has revealed that trading margins for companies such as BP, Royal Dutch Shell and Total have jumped by the equivalent of 100 per cent over the past five years. The companies have seized "opportunities to store millions of barrels of crude cheaply, while locking in a profit by selling them forward in the futures market".

The companies remain largely tight-lipped about their profits, which have fallen in the wake of a year-long slide in oil prices. But according to the Financial Times, BP reported a fall in profits of 20 per cent in the first three months of this year "even though oil prices were down by a half". The oil giant has confirmed its "4,000-strong Integrated Supply and Trading division (IST) had made $350m more than 'normal' in the first quarter of 2015".

The report says that independent traders, such as the embattled Glencore, have only expanded by five per cent since 2010, while the oil majors have used their superior "size and scale [to] gain market share". Producers have also cut back on spending as they seek to protect dividends.

Yesterday oil prices increased for the first time in a week after data showed that US production was once more in decline and reserves of refined products in America had also fallen. International benchmark Brent crude rose above $50 a barrel, while the US benchmark West Texas Intermediate ticked above $47.

These prices remain low and largely unprofitable – and despite some volatility in recent times are roughly where they were in July. Any gains now are believed to be short-lived. Daniel Ang, an investment analyst at Singapore-based Phillip Futures, told CNBC "downward movement is more likely for the rest of this year" as the market braces itself for an increase in exports from Iran.

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