Monday Market Musings >>> The Party is ON at the Oil Club
Last year due to the rapid spread of the Coronavirus, almost every industry was affected by the sudden halt of demand as lockdowns and restrictions shut down the global economy. One of the industries that was most severely hit was the oil industry. The situation got so bad that producers started paying buyers just to get the excess oil off their hands. However, the industry is finally set on making a rebound.
Saudi Aramco, the world’s largest oil producing company (of which Saudi Arabia owns 98% of shares), reported a net income of $30.4 billion in the third quarter alone. An exponential increase in contrast to the $11.4 billion they made in the third quarter of 2020. Their actual performance this quarter was well above the $29 billion in revenue that was estimated by analysts through past trends, indicating that demand is growing at a faster rate than initially projected.
The rapid rise in economic activity has created a massive boom in demand for oil, and many oil companies such as ExxonMobil and Chevron are also harvesting healthy profits. The sudden surge in demand has caused oil prices to reach the highest they have been in the past three years.
Amin Nasser, the CEO of Aramco, commented that their boost in revenue was due to “increased economic activity in key markets and a rebound in energy demand, as well as our unique low-cost position”.
Aramco had piled up massive amounts of debt to keep running through the initial stages of the pandemic. Their gearing ratio, which is a measure of how much their operations are financed by debt, increased from negative 4.9% in the first quarter of 2020, to 23% in the final quarter of 2020. Now they have managed to payback some of their loans and their gearing has reduced to 17.2% due to the rapid increase in cashflow.
However, with the demand for oil back on track and growing rapidly, this creates an incentive for these massive oil corporations to expand production and invest more in increasing their capacity. OPEC, which is an intergovernmental organisation focused on petrol exporting and consists of 13 member nations (of which Saudi Arabia is a founding member) has agreed to increase the output level by 400,000 barrels every day for a month. Saudi Aramco increased its output from 8.5 million b/d (barrels per day) to 9.5 million b/d in the last three months.
This has sparked concerns about their efforts to cut down the use of fossil fuels as they plan to increase its maximum production capacity from 12 million b/d to 13 million b/d. This raises the question of how much effort is really being put in by these massive oil corporations, despite their pledges, to cut down on emissions.
November 1st 2021 | 1:15 PM