Home FinanceEnergy & Environment Huge gains for Oil Majors as Russian sanctions combine with pent-up demand

Huge gains for Oil Majors as Russian sanctions combine with pent-up demand

by YAR

WWith gasoline and diesel hitting record prices amid a post-pandemic surge in driving and flying, it’s no surprise smart guys like Warren Buffett have been racking up shares of some of the world’s biggest energy companies, including Chevron and Occidentals Petroleum. . The mammoth profits are a welcome change for Big Oil, after the 2020 pandemic lockdowns froze demand and temporarily pushed oil prices to zero. Chevron posted first-quarter revenue of $54.4 billion, up 75% from a year ago, thanks to rising oil and gas prices. Its shares have risen 50% in a year. And consider the Saudi Arabian Oil Company; the second largest in the world by market value (after Apple) is also the most profitable, with a score of $105 billion last year. Energy companies were the biggest movers on this year’s Forbes Global 2000 list, with many moving up more than 300 points in the overall ranking.

Despite the earnings boom, this is a very stressful time for the oil giants. President Vladimir Putin’s invasion of Ukraine is roiling energy markets, with a strong likelihood of crippling fuel shortages as sanctions are imposed and Russian oil and natural gas find few buyers. To replace Russia, the world will need every hydrocarbon molecule the energy giants can extract.

The wealthiest G-7 nations have already pledged to embargo Russian oil, while the sanctions are expected to keep 3 million barrels a day off the market by the end of May. That’s a lot, even in a 100 million bpd global oil market, and especially when pent-up post-pandemic demand for driving and flying had already reduced fuel supplies before the invasion.

The current round of draconian Covid-19 lockdowns, which helped hide supply shortages, have reduced China’s oil demand by about 2 million bpd. When China recovers, prepare for gas prices even higher than the $4.25 a gallon now prevailing across the country. A wild card is how much Russian oil will China continue to buy?

Matt Stephani, president of Cavanal Hill Funds in Tulsa, Okla., sees long-term problems for Russia’s oil zone. “Even if there is a short-term truce, I think it will be a long time before the West wants to buy back those Russian barrels.” Although Rosneft, Lukoil and Russia’s Gazprom all scored high in this year’s Global 2000, that is highly unlikely to last. But the world not only needs to find replacements for Russian oil, but also for Russian gas. Before the war, state-controlled Gazprom delivered around 15 billion cubic feet of gas a day to Europe, more than a third of the total supply, and vital for powering power plants and making plastics and fertilizers. But in the wake of Putin’s atrocities in Ukraine, Europe is scouring the world for alternative supplies, in the form of giant liquefied natural gas, or LNG, tankers.

It is unlikely to be enough. Shell CEO Ben van Beurden said in early May that he was concerned about fuel shortages in Europe next winter. “It will be a tough winter if we don’t get any Russian molecules to arrive. That’s the only thing I can say for sure.”

Scarcity brings high prices, which means big profits for oil companies. However, after their near-death experience in 2020, when lockdowns depleted demand for transport fuel and oil prices plummeted to zero, many companies are now being much more careful about how they invest capital. . The current ESG (environmental, social and governance) trend continues to deter energy giants from investing in fossil fuels. Consulting firm WoodMackenzie says annual spending on oil and gas has shrunk from $750bn a year a decade ago to just $400bn a year more recently.

Instead of reinvesting profits into drilling and fracking many new wells, companies have slowed growth and are mostly just drilling to maintain their existing production levels. Even for the largest operators, growth is becoming more expensive. Billionaire fracking pioneer Harold Hamm of Continental Resources recently said that well drilling costs have ballooned by 15%. Even Saudi Aramco, with the largest reserves, says it would take $50 billion of investment over several years to add 1 million barrels a day of new oil production to its current 12 million bpd.

After relegating oil companies to purgatory for the past few years, there are even signs that ESG-focused investors are now finding some positive attributes in Big Oil. Jeff Nichols, partner and head of Haynes & Boone’s energy practice, says ESG is evolving to better appreciate the boon to civilization of reliable energy. “Since the Russian invasion of Ukraine, concepts like ‘energy security’ and ‘conflict-free oil’ have entered the ESG lexicon.”

Warren Buffett is comfortable with Big Oil. In the first quarter, Berkshire Hathaway added $20 billion in Chevron and bought $6.9 billion worth of Occidental Petroleum stock. Berkshire also owns $10 billion of Oxy preferred stock and a warrant to buy 83.9 million shares at $59.60. It’s almost on the money. Oxy recently traded as high as $58.75. Even after the rise in oil, Buffett believes that he still has juice to squeeze.

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