As geopolitics and transportation disasters impact the oil and fuels markets, some oil company CEOs seem most concerned with climate change and environmentalism. For oil and equities traders, the new corporate strategies are something to watch.
1. Oil Majors Divided Over Strategy
Oil majors are divided over strategies to attract investors. Low oil prices have put a dent in their profits over the past few years, while some oil majors, like BP (NYSE:BP), Equinor (NYSE:EQNR) and Royal Dutch Shell (NYSE:RDSa) believe that they have lost investor confidence because they are not adequately addressing climate change. BP and Equinor believe that engaging with potential investors on climate change issues and oil’s contribution to climate change will improve their image. It is questionable whether adopting a strategy of repeatedly questioning the morality of the entire hydrocarbons business will be good for investor confidence and stock prices.
Royal Dutch Shell is essentially re-envisioning itself as a power company instead of an oil company. It’s seeking to become the “world’s largest power company” by the beginning of the 2030s. Shell has been selling off a great deal of its upstream oil assets, and it is buying renewable energy assets instead. In fact, Shell is in the process of bidding to build wind farms in the North Sea. Margins for electricity providers are typically much lower than for oil companies, so it’s not certain if, as a power company, Shell will be able to achieve the 8%-12% returns it is looking for.
Other oil majors, such as Hess (NYSE:HES), Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) are focusing more on traditional aspects. Hess CEO John Hess recently talked about selling off upstream assets with high production costs. Chevron and Exxon are both expanding drilling in the Permian region where they have good access to pipelines and shipping.
2. Oil Production And Sanctions
Oil prices rose yesterday after reports that production growth in the Permian region was overestimated in December, January and February.
Oil 300 Minute Chart
Oil production is still growing in the U.S., but not quite at the rates the EIA projected. Gasoline prices are also on the rise in the U.S., with some areas seeing increases of as much as 34 cents per gallon. Power outages in Venezuela are preventing oil from being loaded onto ships for export, which makes prices rise. Also, Saudi Arabia is planning to produce under 10 million barrels per day in April as well as March, which is more bullish news for oil prices.
This makes U.S. State Department policy on Significant Reduction Exemptions (SREs) even more crucial to oil markets in H2. SRE’s are used by the U.S. to permit certain countries to continue importing specified amount of oil from Iran during the sanctions. Secretary of State Pompeo recently reiterated that the U.S. is focused on pushing Iran’s oil exports down to zero, but he did not give a specific time frame for that to occur. Other State Department officials emphasized that EIA forecasts show that the oil market will remain oversupplied by about 400,000 bpd in 2019. They believe that a well-supplied market is crucial for the U.S. to maintain its sanctions on the Venezuelan oil industry at the same time as it sanctions Iran.
Iran’s oil exports currently average about 1.4 million bpd, so it seems unlikely that the U.S. will try to eliminate all of this oil from the market come May. Brian Hook, the State Department’s special representative for Iran, would not comment on specific exemptions, but did say recently that the President is concerned about making sure that the oil market is “well-supplied and stable.” State Department officials will likely be keeping a close eye on the oil market between now and the end of April, but it now seems increasingly likely the SREs to Iran’s biggest customers, China and India, will be maintained for the rest of 2019.
3. Jet Fuel Demand
Jet fuel demand in the U.S. remained strong in February, according to the American Petroleum Institute. This is generally a good indicator of economic growth in the United States. However, the recent crash of a Boeing (NYSE:BA) 737 Max 8 plane in Ethiopia is leading countries around the world to ground these jets. This will necessitate delays and cancellations of flights across the world. Now that the United States is halting the use of these planes as well, we should expect to see a drop in jet fuel demand in the United States in March.