US oil companies the biggest beneficiaries of sanctions on Russian energy companies

The US super-majors ExxonMobil and Chevron both reported their highest-ever quarterly profits on Friday. Higher oil and gas prices, the highest refining margins, increased production, and aggressive cost control all contributed to the record-breaking profits at Exxon. Chevron also reported record-breaking profits, announcing an increase in share buybacks.

ExxonMobil results were far above analyst expectations and posted second-quarter earnings of US$17.9 billion, or US$4.21 per share assuming dilution. This is nearly quadruple the US$4.69 billion earnings for the second quarter last year, and more than triple the earnings from the first quarter of this year. Exxon’s per share earnings easily beat the analyst consensus of US$3.84.

Higher oil and gas prices, the highest refining margins in years, increased production, and aggressive cost control all contributed to the record-breaking profits at Exxon, were higher than its previous quarterly earnings record in 2012 and the quarterly profits in 2008, when Brent prices hit a record US$147 per barrel.

“Second-quarter earnings were driven by a tight supply/demand balance for oil, natural gas, and refined products, which have increased both natural gas realizations and refining margins well above the 10-year range,” Exxon said.

Another US super-major, Chevron, also posted record earnings beating analyst forecasts, thanks to high oil and gas prices and tight fuel markets driving multi-year high refining margins.

Chevron recorded adjusted earnings of US$11.4 billion, or US$5.82 per share, for the second quarter, up from US$3.3 billion earnings, or US$1.71 per share, for the same period of 2021. The analyst consensus was for US$5.08 EPS for this past quarter.

Chevron increased the top end of its annual share repurchase guidance range to US$15 billion, up from the US$10 billion guidance from March.

Following the results release, Chevron stock was up by more than 3.5% pre-market on Friday, while Exxon was advancing by 2.5%.

The record earnings from the US super-majors add to similarly strong earnings from the European majors, each of which reported much higher profits as commodity prices rallied.

 

 

 

United States GDP falls for second straight quarter

Economy of the United States appeared to shrink for the second consecutive quarter, according to federal data released Thursday, amid growing concern the country could be slipping into a recession.

US gross domestic product (GDP) shrunk between April and June, the Commerce Department reported, marking the second-straight quarter of economic contraction.

GDP fell at a yearly pace of 0.9% in the second quarter, according to the Commerce Department’s first estimate of economic growth over the previous three months.

“The US economy is struggling,” Scott Hoyt, senior director at Moody’s Analytics, wrote in a Thursday analysis.

“We now expect growth to struggle to reach potential both this year and next. However, we don’t believe the economy is in a recession,” he continued.

Many economists expected GDP to fall for a second consecutive quarter as the economy faced more pressure from high inflation, rising interest rates, slowing job growth, falling home sales and other headwinds. 

While the economy was almost certain to slow after growing 5.7% in 2021, experts have become more fearful of the US slowing into a recession after GDP fell at an annualized rate of 1.6% in the first quarter.

Two straight quarters of negative economic growth have long been used as a rule of thumb to determine when the US is in recession and is the formal threshold for a recession in other countries. But economists in the US consider a broader range of data when determining if the US is in recession.

“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the US economy, but the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession at this point,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association, in a Thursday analysis.

A steep decline in business investment and a 3.1% surge in imports, which detract from GDP in calculations, were the two major forces behind the second quarter decline.

 “The data fits with our view that the rate of US economic growth will slow noticeably this year, as households and businesses grapple with record high inflation and a steep rise in interest rates,” Cailin Birch, a global economist at the Economist Intelligence Unit, said in a Thursday analysis.

President Biden and White House officials have tried to convince Americans that the US economy is not yet in a recession thanks to a strong job market. They’ve focused heavily on the NBER’s definition of a recession to show Americans that the economy is not as weak as it may seem.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation. But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” Biden said in a Thursday statement.

Republican lawmakers were quick to release their own declarations of recession. They blamed Biden for driving the economy into ruin and accusing the White House of trying to dupe the American people.

“As Biden and his Democrat allies in Congress busy themselves with changing the definition of a recession, Americans continue to shoulder the burden of troublesome economic conditions,” Rep. Blaine Luetkemeyer, the ranking member on the House Small Business Committee, said in a Thursday statement.

The Federal Reserve is likely to keep boosting interest rates as inflation rises, which will continue to slow the economy, as the war in Ukraine and pandemic-related supply chain challenges threaten to make inflation worse.

 “Whether the economy meets the conventional or formal definition of recession is in many respects immaterial. Either way, households and firms are reeling from combined energy, inflation, and rate shocks that have damped individuals’ purchasing power and are in the process of reducing household living standards,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM.

“That is the toll levied by the inflation tax and is why it is critical to restore price stability to the economy as soon as is reasonably possible,” he continued.

 

Pakistan Mild Respite Ahead

Pakistan ended FY22 with a 4-year high current account deficit (CAD) of US$17.4 billion (4.6% of GDP) as against US$2.82 billion (0.8% of GDP) a year ago.

CAD for June 2022 swelled 59%MoM to US$2.3 billion as imports hit a record high of US$7.04 billion on the back of energy imports. This was despite the second highest monthly exports and seasonal rise in remittances.

In the absence of adequate foreign exchange liquidity, the disruption in goods imports along with administrative ban on non-essential items is likely to trim CAD to a sizeable extent in the coming months.

However, Pakistan’s leading brokerage house Inter Market Securities sticks to its base case estimate of US$12.6 billion (3.0% of GDP) for FY23. The most contraction in import bill will be led by absence of TERF-related machinery and COVID-19 vaccinations in addition to the respite from palm oil imports.

Trade deficit hit an all-time high of US$3.9 billion in June 2022 owing to record imports of US$7.04 billion, despite second highest monthly exports of US$3.1 billion, up 26%MoM.

Pakistan’s energy requirements surged tremendously during June 2022, as country’s monthly oil import bill hit the highest mark of US$2.9 billion.

Going forward, imports are likely to stay lower than FY22 monthly average of US$6.0 billion owing to low machinery and vaccination imports, coupled with relatively lower international oil prices and crack spreads.

Some savings will also likely emerge from Foods imports as international palm oil prices have come off by 50% recently. All this is in addition to bottlenecks created by inadequacy of foreign exchange liquidity and administrative measures to curb non-essential imports.

A against this , export of textiles and clothing remained high in FY22 owing to summer demand and adequate energy availability, but home textile demand growth may unlikely stay put in FY23.

Remittances during June 2022 increased 18% to US$2.8 billion on account of seasonal rise from Eid-festivity-flows, managing to remain above FY22 monthly average of US$2.6 billion.

Cumulatively, remittances have risen 6%YoY to US$31.2 billion in FY22. The brokerage house believes, remittance growth is likely to remain tepid as the normalized travel, opening up avenues of non-banking channels.

Despite the US$2.3 billion rollover from China in June 2022, Reserves held by State bank of Pakistan (SBP) increased by a meager US$420 million June 2022 amid elevated imports keeping import cover around 1.5 months.

The IMF staff level agreement is through and the US$1.17 billion tranche is subject to Board approval, and likely to be released by end August 22.

The brokerage house believes, Pakistan’s attempts towards overcoming the foreign exchange liquidity constraints will be difficult, more specifically in terms of bond issuances in the current scheme of things.

This will garner an approval for executing an express transaction to sell government stake in State-Owned Entities (SOEs).

Pakistan: Uncertainty continue to mar economic performance

The Supreme Court of Pakistan has announced its verdict in favor of Ch. Pervaiz Elahi, who has finally assumed the charge of Chief Minister Punjab.

Punjab’s economic and political importance is unparalleled for any party looking to form a government in the center. The province has a population of about 110 million, making up 52% of the country’s populace.

In the FY23 budget, Punjab had budgeted a surplus of PKR125 billion, and federal allocations of PKR1.7 trillion were envisaged for the province (50% of the divisible pool). Any alterations to the budgeted provincial surplus, though unlikely, can result in trouble for future tranches from the IMF.

PTI Chairman, Imran Khan, has repeatedly asked for fair and free elections ever since his ouster in April this year. Following the recent events, PML-N Chief, Nawaz Sharif, also stated that he was in favor of holding early general elections as delaying the same would be disadvantageous to the country.

With Punjab firmly under the PTI coalition and its nominee Pervaiz Elahi at the helm of the provincial government, PTI is now expected to make a move towards the National Assembly and make its government in the center.

The political crisis in the country which started after the dismissal of Imran Khan from his office has seen Pak Rupee depreciate by 27% against the Greenback.

The current political uncertainty comes at a time when the country is already struggling with soaring current account deficit and colossal foreign debt repayments which in confluence with the political uncertainty had put serious pressure on the currency.

The current political and economic uncertainty has resulted in markets starting to price in default risk, resultantly the yields on Eurobonds/Sukuks have reached all-time high, with the December 2022 maturity instrument yields soaring to 45.6%.

At the same time, the PKR depreciation has continued unabated, despite Pakistan having reached an SLA, where concerns over filling a US$4 billion funding gap identified by the IMF remain.

Analysts expect the IMF program to resume soon irrespective of political developments, toning down the uncertainties surrounding Pakistan’s external vulnerability.

However, domestic issues (elections, inflation, interest rates) are likely keep Pakistan’s equities market under pressure.

Eroding foreign exchange reserves rendering State Bank of Pakistan helpless

One of the prime mandates of the central banks around the world, particularly of the third world countries, is to manage exchange rate efficiently and effectively, and State Bank of Pakistan (SBP) is no exception.

However, the recent free-fall of parity raises many questions that include:

1) Isn’t SBP allowed to intervene?

2) Has SBP lost capacity to intervene?

3) Aren’t some groups having vested interest responsible for the present trauma?

 With the utmost disgust, I have to say that the SBP is helplessly watching from the sidelines as the rupee is registering from one all-time low to another low.

Even a Pakistani of ordinary wit understands that in the absence of enough foreign exchange reserves, the SBP can only watch the trauma helplessly.

Please allow me to say that purposely created political turmoil has become the source of all kinds of shocks, pushing Pakistan to imminent default.

Added to political instability are: 1) structural weaknesses of the external sector, 2) higher global prices of fuel and food commodities, 3) geopolitical pressures rendering Pakistan helpless and 4) delay in the revival of the International Monetary Fund (IMF) program.

Between April 7 and July 22, rupee has lost more than 21% value against US$.

Now, the most disturbing question is how long will the rupee continue to decline?

I am afraid neither the Government of Pakistan (GoP), nor the SBP has the reply. Copybook reply being presented is, “Things will become better when US$ 1.17 billion tranche is released, hopefully in last week of August”.

However, analysts say Pakistan needs around US$35 billion for debt serving etc. Therefore, IMF tranche is peanuts and inflows from China, Saudi Arabia and UAE will provide a temporary breathing space only.

One needs not be a genius to understand that if Pakistan’s import bill of goods and services continues to eat up more than 90% of the foreign exchange earnings through remittances, export proceeds and foreign investment then hardly anything is left for external debt servicing.

I am forced to infer that the GoP will continue to borrow for debt servicing and will never attain comfortable level of foreign exchange reserves in the foreseeable future.

Dishonest western media not reporting correct situation of oil market

Over the years I have been saying that Western media often rum ‘tinted’ reports. This morning I got yet another proof to support my attribution.

It has been reported that for the second straight week, the main oil futures contracts have seen a marked rejuvenation in open interest, primarily coming from bullish long positions.

It was inferred that despite ongoing fears of an economic recession, traders believe that the selloff earlier this month was overdone.

This means the markets are largely ignoring the return of Libyan oil. In addition, Europe’s natural gas woes have strengthened demand prospects for middle distillates, with diesel switching in the winter months now a very real possibility.

The spread between the world’s two leading crude benchmarks, Brent and WTI, is as wide as it has been in more than three years, moving as far as US$8.50 per barrel recently.

Previous strength in WTI has been tangibly beaten down by weakening gasoline demand and several consecutive stocks builds.

US crude exports have seen a substantial drop compared to record highs seen in April-May, but the wide Brent-WTI spread will provide a huge boost to European buying of the American benchmark.  

The OPEC+ group had a massive shortfall of 2.84 million barrels per day (bpd) in June between actual production and the target oil output level as part of the deal. 

As OPEC+ is unwinding its cuts, more and more members are falling further behind their quotas due to a lack of capacity or investment in supply.

In June, the compliance rate at the OPEC+ group soared to 320% from an estimated 256% in May, according to Argus’s sources, suggesting that the gap between nameplate production per the agreement and actual production continues to widen. 

Per an Argus survey from earlier this month, OPEC+ pumped more than 2.5 million bpd below its target in June, despite a rebound in Russia’s oil production that helped the group’s output rise by 730,000 bpd from May. 

Russia’s oil production rose in June and was approaching the levels last seen in February, just before the Russian invasion of Ukraine. Most of the rebound was due to higher intake from domestic refiners.  

The ten OPEC producers in the OPEC+ pact pumped 24.8 million bpd of crude oil in June, with production falling one million bpd short of the target levels.

Top OPEC producer Saudi Arabia naturally raised its crude oil production by the most in June compared to May.

Yet, per OPEC’s secondary sources, even the Saudis were lagging behind their quota for June. Saudi Arabia’s oil production rose by 159,000 bpd to 10.585 million bpd. To compare, the Saudi target was 10.663 million bpd, the Kingdom was 78,000 bpd below its quota last month using secondary source figures.

OPEC+ is expected to continue to underperform by a lot compared to its production targets for July and August after the group decided to accelerate the rollback of the cuts and have those completely unwound by the end of August. 

Would Hezbollah risk war with Israel over Karish gas rig?

Less than a month before the Karish gas rig is set to start operations, Hezbollah’s Secretary General Hassan Nasrallah has upped his rhetoric to use force to stop Israel from extracting gas.

“If the extraction of oil and gas from Karish begins in September before Lebanon obtains its right, we would be heading to a problem and we will do anything to achieve our objective,” Nasrallah said in an interview on al-Mayadeen TV on Tuesday night.

“No one wishes for war and the decision is in Israel's hands, not in our hands,” he said. But his opponents say, “It is in Nasrallah’s hands, and the leader of the Lebanese terror group knows it. They say, “He is making a calculated gamble that the negotiations over the disputed maritime border will end in favor of Lebanon.

Nasrallah warned, “All fields are under threat and that no Israeli target at sea or on land is out of the reach of the resistance’s precision missiles.”

While tension has risen significantly between Israel and Hezbollah, the intelligence community does not think that Nasrallah would drag the entire region into war over the rig. But, the intelligence community is not always right. 

They refer to the Second Lebanon War. Haaretz’s Amos Harel, a senior officer said that a day before the ambush of troops and kidnapping of two reservists in 2006, we didn’t have a clue.

Another example where the military did not expect war was last year in May when Hamas launched a barrage of rockets toward Jerusalem. That led to 11 days of conflict between Hamas, Palestinian Islamic Jihad and the IDF and over 4,000 rockets and mortars fired into Israel.

Israel knows Hezbollah is not like Hamas. Over the last 15 years, since the Second Lebanon War, Hezbollah has significantly increased its capabilities which will cause untold damage and cause significant casualties in Israel.

With the help of Iran, the group has rebuilt its arsenal and it is estimated that Hezbollah has between 130,000-150,000 rockets and missiles, many that can reach deep into Israel, including ballistic missiles with a range of 700 kilometers and a handful of precision missiles that are expected to be fired toward strategic sites.

It is believed that in the next war, Hezbollah will try to fire some 1,500-3,000 rockets per day until the last day of the conflict. 

Threats from Nasrallah are nothing new; it’s almost as if whenever he says something it’s to threaten Israel and the IDF.

But recently, Israel has taken the threats more seriously, and Defense Minister Benny Gantz told Alon Ben David of Channel 13 that the situation on the northern border is sensitive.

 "The person who made the lives of Lebanon's citizens worse is Nasrallah, I hope he stops while he still can. He understands that he needs to be careful,” Gantz said, adding, "If he challenges us, we will take off our gloves and we will hurt them.”

Israel sees the Karish rig as a strategic asset several kilometers south of the area over which negotiations are being conducted, and has warned that it will defend it.

But Nasrallah, who sees himself as the defender of Lebanon, also wants to defend it from Israel, even if that means dragging the already crumbling Lebanese state into war with the IDF.

When asked if the group could win a future war with Israel, Nasrallah said that the Lebanese should be confident in the resistance’s capabilities.

 Nasrallah, who answers to Tehran and not to Beirut, added that while the group has not asked anyone to join a future war on our side, it is not known if other forces might join such a war, and this a strong probability.

Hezbollah has made it clear that they will continue to challenge Israel over the rig, despite the real risk of deteriorating into a full-blown war. 

Unlike previous wars, this would be a war over a strategic economic asset. Lebanon has been suffering from a crippling economic crisis since 2019 that has only gotten worse with the global food and fuel crisis. A ruling in favor of Lebanon would allow the country to finally have some breathing room for its population which has not had a break in years.

Israel, of course, is not immune to the crisis and the Karish was set to be an answer to the country’s expanding demand for energy. The excess gas would also be available for export, such as for Europe, which is reeling from Russia’s war in Ukraine and its threat to shut off or reduce supply to the continent over its support for Kyiv.

Isreal anticipates that it would not look like a war with Hamas and it would not look like the war between Russia and Ukraine. A war with Hezbollah would drag the entire region into a war that would also see all terror groups and Iranian proxies take part. And the complete destruction and deadly consequences of the war would be on Nasrallah, not the IDF.