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Never Again: Big Oil Is Back And Practicing Caution

Oil

Royal Dutch Shell posted much better-than-expected earnings for the second quarter, a sign that the oil majors are adapting to a low oil price environment. Net profit jumped to $3.6 billion, more than triple the earnings for the same quarter in 2016.

Some analysts saw a lot to like in Shell’s financials. “They bought BG, they’re shipping costs out of the business, cash flow is very robust and the industry itself is learning to live with oil at these prices,” Brendan Warn, an analyst at BMO Capital Markets, told Bloomberg. “Shell is showing it’s not just about disposals, but the entire business itself that is driving earnings.”

Shell has some of the highest debt levels in the industry, but reported a third consecutive quarter in which it managed to whittle away at its debt pile. That eased concerns about the sustainability of its dividend – and Shell announced its dividend of $0.47 cents per share would stay the same for the second quarter.

The figures suggest that Shell and its peers are back in business, even with oil prices stuck roughly at $50 per barrel. According to projections from Sanford C. Bernstein, the seven largest oil companies will see cash flows grow by 42 percent in the second quarter from a year earlier.

Globally, the oil industry will slightly increase spending this year, compared to 2016. But Shell’s CEO Ben van Beurden insisted that his company would not get carried away, promising to “remain very disciplined.” Regarding oil prices, van Beurden declined to make any predictions, telling CNBC that the oil markets are not “very transparent.”

Related: The Next Big Catalyst In The U.S. Oil Export Boom

In fact, the oil majors are starting to come around to the idea that oil prices, rather than rebounding, will remain depressed for the foreseeable future.

Shell’s CEO Ben van Beurden has even gone as far as saying that the oil demand will peak, which will ultimately mean that oil prices will remain “lower forever.” The rapid adoption of electric vehicles (EVs) is not only inevitable, but a positive development, van Beurden says. “The whole move to electrify the economy, electrify mobility in places like northwest Europe, in the U.S., even in China, is a good thing,” van Beurden said in an interview on Bloomberg TV Tuesday. “We need to be at a much higher degree of electric vehicle penetration.” He even added that his next vehicle purchase will be electric.

“If policies and innovation really work well, I can see liquids peaking in demand in the early 2030s and maybe oil will peak a little bit earlier if there’s a lot of biofuels coming into the mix as well,” van Beurden told Bloomberg TV.

Some of that could be a bit of PR strategy, but Shell is increasingly betting its future on natural gas as opposed to oil production. Shell is betting that gas still plays a prominent role in a carbon-constrained world as a source of electricity generation.

Shell’s comments came a few days after the UK announced a complete ban on the sales of gasoline and diesel vehicles by 2040. The UK follows France in issuing a clear signal that fossil fuels will be phased out.

The threat of EVs, but particularly the specter of permanently low oil prices, is pushing investors to pressure the oil majors into remaining cautious, the WSJ reports. Rather than growing production, which was always the goal in years past, the main objective is to improve cash flow and profitability with an eye on $50 oil.

“We need to see discipline and people being more realistic about where oil prices could remain for quite a long time,” Jason Kenney, an analyst at Banco Santander, told the WSJ.

Related: Daily OPEC Oil Prices Now Public For The First Time Ever

Some analysts see that realization sinking in with oil executives. “I think a lot of these companies have found religion,” Brian Youngberg, senior energy analyst at brokerage firm Edward Jones, said in a WSJ interview. “They realize now they can’t just spend, spend, spend. They have to be more disciplined with their capital.”

The WSJ pointed out that BP’s share price has been clobbered worse than its peers, a dynamic attributed to the British oil company’s decision to pursue growth after years of cost cutting.

It remains to be seen how the oil majors adapt to the rapidly changing oil market, but cost cutting and restraint seem to be the order of the day.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Timothy Smith on July 27 2017 said:
    "“If policies and innovation really work well, I can see liquids peaking in demand in the early 2030s and maybe oil will peak a little bit earlier if there’s a lot of biofuels coming into the mix as well,” van Beurden told Bloomberg TV."

    Interesting quote from Shell's CEO

    Timothy Smith, SFO
    Petro Lucrum, Inc.
    Single Family Office
  • jack b :-) on July 28 2017 said:
    Interesting article. Shell ceo comments pretty odd though...

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