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The deep dive: It’s a bird…it’s a plane…no, it’s the price of oil!

The deep dive: It’s a bird…it’s a plane…no, it’s the price of oil!

Like a phoenix rising from the ashes, the price of oil has taken off this year and reminded us all why it’s still the world’s most valuable commodity. Oil is the guilty pleasure of consumers, international corporations, and world governments alike. We know it’s no bueno for the planet — but the truth is, we’re still too reliant on it to give it up just yet.

Since the Industrial Revolution, appetite for oil has been harnessed by the world’s most powerful people. 19th century robber baron John D. Rockefeller kept a tight grip on the resource with the world’s first oil cartel – Standard Oil. Rockefeller used the size advantage of Standard Oil to crush smaller competitors, flooding markets and lowering prices to where only he could survive.

American politicians eventually broke up Standard Oil, but the same cutthroat tactics are still being used today. In 1960, leaders from Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela met in Baghdad to pick up where Rockefeller and Standard Oil left off. They shook hands and formed OPEC, or the Organization of the Petroleum Exporting Countries.

OPEC has since grown to include 13 member states and hasn’t loosened its grip on the world’s oil supply one bit. When the global economy screeched to a halt in the spring of 2020, demand for oil collapsed, and OPEC’s two most powerful members decided to flex their muscles and remind everyone who’s on top. Just like Rockefeller, Russia and Saudi Arabia turned up output to the max, flooding the market with supply and sending prices to historic lows.

In April of 2020, oil prices were lower than they’d been in decades to the point where futures contracts even went negative. By summer, prices had rebounded and stabilized — and by fall, the global economy started to awake from its slumber. The world’s appetite for oil followed, and since then prices have more than doubled.

When energy demand dried up last year, so too did government revenue for oil-dependent nations like Saudi Arabia and the UAE. The shock was a reminder to these governments of the risk of having budgets largely reliant on a single industry and the volatile commodity prices that drive that industry.

The pandemic was the spur these countries needed to accelerate their economic diversification programs. According to a survey done by market research firm IHS Markit, non-oil private sector business activity in Saudi Arabia is growing at a “rapid pace”, the quickest in nearly four years. The same survey showed non-oil private sector business activity in the UAE at the highest it’s been since 2019.

In today’s deep dive we’re going to be exploring how some companies have benefitted from this year’s oil rally.

Saudi Aramco

Okay, we can’t not talk about Saudi Aramco. Riding out last year’s bear market wasn’t fun for the oil titan, but now that patience is paying off. In its recent third-quarter earnings report, Saudi Aramco boasted a 158% year-over-year growth in quarterly profits.

Q3 net profit came in at $30.4b, beating analyst expectations of $29.1b. In the third quarter of last year, when oil prices were less than half what they are now, Saudi Aramco profited just $11.8b. CEO Amin Nasser credited the rebound in global energy demand for profit growth, and said his company is “optimistic that energy demand will remain healthy for the foreseeable future.”

It wasn’t just rising oil prices that helped Saudi Aramco. In 1998, the company entered the petrochemical business to create petroleum byproducts like aromatics, olefins, polyolefins, and synthetic rubber. Nasser pointed out that higher margins in this business also contributed to Q3 success.

Exxon Mobil

In its third-quarter earnings report released back in October, Exxon Mobil (XOM) also had good news to share. The company reported a Q3 profit of $6.8b, the highest quarterly profit it’s seen in years. Earnings per share came in at $1.58, beating Wall Street’s expectations of $1.56.

The results were certainly buoyed by increased demand and oil prices, but the profit growth had more to do with streamlined operations and cost reductions than revenue, which was around $3b less than what analysts were expecting. When energy demand tanked last year, Exxon shareholders demanded capital discipline. The aggressive cost-cutting measures implemented by the company have paid off.

Along with the earnings report, Exxon announced its first dividend increase in more than two years. The company also laid out next year’s share repurchase program where it will be buying back up to $10b worth of stock over the next 12 to 24 months.

Chevron

Chevron (CVX) followed the lead of its big brother Exxon last quarter, generating its highest free cash flow on record thanks to surging oil prices and lower operating costs. The company profited $6.1b on revenue of $44.71b, an 80% year-over-year increase. According to chairman and CEO Mike Wirth, “third quarter earnings were the highest since first quarter 2013 largely due to improved market conditions, strong operational performance, and a lower cost structure.”

In the third quarter of 2020, Chevron generated a net loss of $207m on revenue of just $24.45b. Capital discipline has been a big priority this year for Chevron as well. Its spending was down this quarter by 22% year-over-year.

This year’s rally in energy demand and oil prices (and the subsequent boost in revenue) helped Chevron to pay down $5.6b in debt this past quarter and fund its $2.6b dividend. The company plans to keep increasing its production to meet rising demand.

why it matters

Filling up your car might be a little more painful these days, and despite pleas from environmentalists, pledges from world leaders, and our recent ESG themed deep dive series, oil remains the lifeblood of the global economy. It runs through the cars that take us to work, the ships that bring us our favorite products, and the planes that take us to our favorite places. Afterall, how else are you going to get to Europe this summer?