Oil giants earn record profits    

Back in 2020, pandemic-induced lockdowns led to a record-breaking collapse in the oil industry, as the price of oil cratered below $18 a barrel. As countries lifted economic shutdowns and travel demand increased, the battered oil industry has gone from surviving to thriving, with the oil price and energy revenues reaching record highs in 2022.  

Today, we look at the energy industry, record-high profits by oil companies, and share advice for traders in the commodities sector.  

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 War sends oil prices soaring  

Russia’s invasion of Ukraine, and resulting sanctions, propelled the price of oil by 45% in the first quarter to an average of $114 per barrel, the highest in seven years. Russia, one of the world’s biggest oil producers, is facing steep sanctions and outright bans on many of its exports. The combination of sanctions, high demand, and energy insecurity propelled the oil price to record highs.  

Globally, oil prices reached a 14-year high in March 2022; WTI and Brent Crude reached $119 and $124 respectively. Prices have since stabilised but remain within reach of $100 a barrel – WTI is $91.49 and Brent oil is trading at $97.75.   

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One sector that has thrived in this unprecedented period of energy insecurity is oil companies.  

War profiteering  

A snapshot of the world’s largest producer of fossil fuels, Exxon Mobil (XOM), provides a good insight into staggering profits made by the world’s major oil producers.   

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Exxon earned $19.7 billion from July to September 2022, that’s more revenue than it has generated in any other three-month period yet. The company said it was fulfilling its “commitment to return profits to shareholders” by buying back $10.5 billion of its stock and raising its dividend payments to investors.  

To put Exxon’s record earnings into perspective, Apple, the world’s most valuable company, reported $20.7 billion in profits during its Q3 earnings report.  

Big Oil bonanza     

The volatility in the oil and gas sector has created a profit bonanza for ‘Big Oil’ in 2022. Shell reported $9.45 billion in profits for Q3 2022 and is also set to purchase $4 billion of its stock. Chevron reported $11.2 billion in profits. Saudi energy giant Aramco briefly usurped Apple as the world’s most valuable company before the tech titan reclaimed the coveted position.  

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Shares of the five major companies have all posted a total return of at least 29% in 2022. Exxon leads the way with an 86% increase, by comparison, the broad-market S&P 500’s total return is -19%.  

Recession woes to affect oil prices     

Oil prices slipped on November 8 as recession concerns and worsening COVID-19 outbreaks in China sparked fears of lower fuel demand.  

A global recession will, as we’ve seen in 2020, curb oil demand and could trigger a crash. A stronger US dollar is also affecting oil prices; oil is generally priced in US dollars, so a stronger greenback makes the commodity prohibitively more expensive for many countries.  

The high cost of oil has the knock-on effect of increasing the price of all goods in the supply chain. High fuel prices mean increased costs of all goods and services such as fuel for vehicles and homes. These effects diminish consumer confidence and slow the global economy.   

Covid scourge     

Then there’s the ongoing battle against COVID in Asia. China has implemented a strict zero-COVID policy which has limited the country’s economic ability and heavily affected trade. Data shows the country’s imports and exports contracted in October 2022.  

Coronavirus cases are surging in Guangzhou and other Chinese cities report the Chinese government. The biggest Asian manufacturing hub is fighting its worst rise of COVID cases yet.   

Looming oil ban  

Another factor that could heavily affect the oil price is a looming European ban. The European Union (EU) ban on Russian oil, imposed in retaliation for Russia’s invasion of Ukraine, is set to begin on December 5. This is set to be followed by a total halt on oil product imports by February 2023.   

The USA and allied nations of the ‘Group of Seven (G7)’ rich nations aim to prevent Russia from profiting from oil. This is easier said than done as the G7 needs to balance sanctions while ensuring that oil continues to flow to global markets.  

As a result of the upcoming embargo, analysts believe oil prices will rise even though refineries worldwide are increasing their output.  

US oil refiners in the final quarter of 2022 are set to increase their productivity to near or above 90% of capacity. That’s an incredible pace and is sending jitters in the energy sector.  

Similarly, China’s largest private refiner, Zhejiang Petroleum and Chemical, is also raising diesel output.  

Kuwait Integrated Petroleum Industries said in November that the first phase of its Al-Zour refinery has begun commercial operations.  

Price cap  

The G7 as part of its oil sector strategy will cap prices of sea-borne oil shipments. In retaliation, Russia has threatened to stop selling oil to capping- countries. This could result in a further cut I n its oil production and turn, would shrink an already tight global supply.  

Ultimately, this scenario will lead to higher oil prices and volatility.  

Overall  

The oil commodity sector is expected to see major volatility once the ban is implemented. It’s no easy task to sanction the world’s biggest oil producer and many consumers, already reeling from high fuel prices, can expect even higher prices before the situation is stabilised. Russia’s ongoing war in Ukraine has no end in sight despite major victories by the Ukrainian Armed Forces. Russia has mobilised hundreds of thousands of troops dashing hopes that the war would end before the Northern Hemisphere winter sets in. 

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