For oil companies, it’s been a phenomenal year when it comes to profit margins. Companies in the oil industry are enjoying record profits thanks to unusually high commodity prices and high returns on capital expenditures. Big Oil companies like Exxon Mobil and Chevron recorded all-time highs in profits during the third quarter of 2018, and full-year profits are also expected to break records this year as well.
According to Goldman Sachs, the average return on equity in the oil industry should come in at around 34% in 2018, compared to an average of around 13% in other sectors like energy services and basic materials.
The latest Oil Profit headlines
Oil profit margins are at a high right now, but not all companies are making bank. Investors have been pouring in more money to the oil industry this year, and it’s working! Oil profit margin revenue grew an estimated 37% in 2017 versus 2016, per U.S. EIA data cited by Deutsche Bank’s Torsten Slok (via CNBC). Despite rising production in the United States and Canada, OPEC has tried to keep prices low with record production levels in order to punish America for pulling out of Iran, deal-although Americans shouldn’t expect gas prices to go down anytime soon!
Impact on your portfolio
Exxon and Chevron, the two largest oil companies in the US, have seen record-breaking profits this year. They are pumping oil with higher margins because of increased global demand and rising crude prices. Chevron has seen a profit increase of $4 billion since last year (to about $21 billion), and Exxon’s profit is up by a whopping 45% to $17 billion. In addition, petrochemical manufacturer Dow Chemical reported a 78% jump in its third-quarter net income on Wednesday.
What’s going on?
Oil profit margins are up to a whopping $10 billion. To get an idea of how high this is, back in 2014, oil companies’ profit margins were at a measly $8 billion. This number has continued to rise steadily year after year, and oil production continues to be high, which means we should expect these profits to continue going up.
It’s not difficult to see why the prices are up so much – at one point, a barrel of oil went for over $3,000, but now it hovers around the $50–$55 range.
Is this sustainable?
There is no doubt that companies in the oil industry are enjoying record profits. However, a closer look at the numbers shows that not only are they high, but also margins have risen dramatically in recent years.
Oil profit by year has nearly tripled in just seven years and quadrupled since 2002, going from an average of $2bn to $6bn a year. Now up to $5bn of these increased profits stem from either keeping production steady or raising output levels even though prices had fallen since their 2014 peak when prices peaked at over $100 per barrel. This will be one of the largest cash flows ever made, said Ian Taylor, chief executive of Vitol, which was one of the world’s largest oil traders before entering its own production business 20 years ago.
How should I react?
Oil profits are soaring, according to OPEC. Oil-producing countries managed to sell oil for just $52.21 a barrel on average in November 2016, which is the lowest monthly figure since December 2003 and down 60% from 2015. You’re wondering how this could be a good thing for you, right? Let’s think about it. If oil production was too high, then prices would fall, so companies aren’t incentivized to sell their oil since they can’t profit from it at current rates. That means that prices will eventually go up.
Oil profit margins have jumped so sharply this year that they are approaching the levels reached during the last American oil boom in 2005. And there are still another five months of hurricane season left to go. According to the Wall Street Journal, oil profits this year were pushed up by extreme weather phenomena, namely Hurricane Harvey and Irma.
These storms caused interruptions in the normal flow of trade in Texas and Florida, respectively–some estimates say the consequences for US GDP are about $160 billion worth. The market is estimating an increase of 6% in oil demand because these hurricanes and power outages destroyed refining capacity, which could add up to an additional $6 per barrel charge in profit margin for each disruption.
Oil companies are raking in record profits, much to the dismay of environmentalists. The top 12 oil producers pumped about $2.5 trillion worth of crude in 2017. Now it’s time for you to start making money with Bitcoin and claim a piece of the digital pie. Bitcoin has been experiencing unprecedented growth, attracting investors from all over the world because Bitcoin is not centralized, and people who invest can make enormous profits while reducing their risk exposure.
Zuella Montemayor did her degree in psychology at the University of Toronto. She is interested in mental health, wellness, and lifestyle.