The energy sector seems to be the “winner” in the war between Russia and Ukraine. In any case, oil and natural gas producers proudly report record profits for their investors.
For example, Shell, a company listed on the London Stock Exchange, announced that 2022 was the most profitable year in its history. Last year they “pocketed” $40 billion in net profit. Speaking of their success, they said, “The Russian-Ukrainian conflict led to higher prices in the energy sector, doubling the profit margin and providing investors with unexpectedly high returns”. In fact, it doubled last year’s net income.
It was a good performance not only for energy investors but exceeded the expectations and estimates of independent analysts. Prior to that, the company made a profit of $31 billion in 2008, its most profitable year.
Not only Shell, but its competitors broke the news that they had doubled their revenues and profits compared to previous years. Norway’s Equinor also doubled its operating profit to $75 billion. BP (British Petroleum) made a profit of $28 billion in 2022. It surpassed its 2008 record profit of $26 billion. Russian state-owned Rosneft’s profit growth was slightly lower than that of its competitors because of the transfer of 19.75% of its assets.
Looking at the big picture, the total net profits of the world’s six largest oil producers more than doubled and reached $219 billion in 2022. Of these, they have announced that they will return $110 billion to their shareholders by distributing it as dividends or buying back their shares.
In general, oil suppliers see 2023 as another year to replenish their wallets. This is influenced by both supply and demand.
On the demand side, there is great hope that the Chinese economy will reopen and consumption will increase after China eases pandemic restrictions. On the supply side, the position of OPEC+ members is firm and unanimous – to cut oil production by the end of 2023.
Last October, OPEC (the Group of Petroleum Exporting Countries) revised its oil forecast and decided to cut production because of certain demand-side risks. They estimated that total world demand in 2023 will be 102.02 million barrels per day, a relatively slow increase of only 2.34 million. Therefore, the OPEC group agreed to cut production by two million barrels per day. This equates to two percent of total world demand. However, the U.S. Department of Energy believes that demand in 2023 will be even lower, at 101.03 million barrels.
The OPEC+ meeting on the first day of February was very short. Despite high hopes for a revival of the Chinese economy and a recovery of demand, exporters showed little desire to increase production. The online meeting, attended by energy ministers from OPEC+ countries or major members of the organization plus Russia, ended in less than 30 minutes.
Ministers from the Joint Ministerial Monitoring Committee (JMMC) reviewed production data and “reaffirmed their unity on the proposal to implement the OPEC+ agreement by the end of 2023,” OPEC said in a statement following the meeting.
Russia recently decided to cut oil production by 500,000 barrels per day, starting in March. Deputy Prime Minister Alexander Novak said this was in response to Western European countries imposing a price ceiling on oil exports. Following Russia’s statement, OPEC also announced that it was not thinking about increasing production.
OPEC expects the price of crude oil to reach $100 a barrel this year due to supply shortages and a recovery in demand.
There are factors affecting the exchange rate. First, the slowdown in the U.S. economy and the global economy.
Fears that the U.S. economy will stall and that excessive monetary tightening will exacerbate the country’s rising unemployment rate are the main factors curbing prices. However, given the extremely high number of new jobs in January, investors expect the Federal Reserve to raise interest rates sharply next time around. In a related development, Goldman Sachs cut its 2023 Brent oil price forecast to $92 from $98 and lowered its 2024 price forecast from $105 to $100.
There are few signs of recovery in Chinese demand, which is the main hope for price growth. On the contrary, the numbers show that this is weakening. Last month, China’s oil imports totaled 10.98 million barrels per day, down from 11.37 million barrels per day in December and 11.42 million barrels per day in November. Thus, it is unclear how much demand will recover in February, suppressing prices that have risen slightly since the beginning of the year. Oil prices have fallen for three months in a row.
In addition, sources say that despite production cuts, the government has not set an exact price for Russian oil for export. The Kremlin continues to state that it will not follow the price ceiling set by Western countries for the purchase of Russian oil. But in reality, Putin has not set any price limits for Russian oil producers and has given exporters the right to set their own prices, Reuters reported.
The G-7 countries offer to buy oil from Russia at a price of $25-35 lower than on the world market. However, the demand for oil in Western European countries is growing, and OPEC is trying to take advantage of this opportunity.