Record Profits for Oil Giants in Q2 Amid Middle East Tensions
Major oil companies (Big Oil) are poised to report record-breaking profits in the second quarter of 2024, as crude oil prices surged to four-year highs following disruptions in the Strait of Hormuz. According to analyst estimates compiled by LSEG and reported by Reuters, both ExxonMobil and Chevron could report profits triple those of the first quarter, marking one of the most profitable quarters since 2022.
Historic Market Disruption in Q2
The second quarter witnessed the most severe supply disruption in oil market history, causing oil flows from the Middle East to grind to a halt. This triggered a surge in oil prices and increased volatility while depleting inventories, even in the United States.
Oil prices skyrocketed as tensions escalated in the Middle East, particularly following incidents involving the Strait of Hormuz - the world's critical maritime chokepoint for oil transportation.
Record-Breaking Profits for ExxonMobil and Chevron
According to analyst estimates compiled by LSEG and cited by Reuters, ExxonMobil is expected to report $15.9 billion in adjusted net profit for Q2, while Chevron could reach nearly $10 billion. This figure represents triple the profits of both oil giants in the first quarter.
| Company | Q2 Profit (Billion USD) | Q1 Profit (Billion USD) | Increase Ratio |
|---|---|---|---|
| ExxonMobil | 15.9 | ~5.3 | Triple |
| Chevron | ~10.0 | ~3.3 | Triple |
Highest Profits Since 2022
Profits for all major oil companies in the April-June quarter are expected to be the highest since 2022 - the last time oil prices exceeded $100 per barrel following Russia's invasion of Ukraine. Like in 2022, major oil companies now face criticism for profiteering from conflicts and high gas prices.
Key Difference: President Trump's Involvement
The key difference in this scenario is that accusations and calls for investigations into high gas prices are coming from President Donald Trump himself - a figure considered to be supportive of the oil industry. He demanded that gas prices in the U.S. drop to $2.25-$2.50 per gallon "immediately," following the conflict he initiated with Iran that sent international crude prices soaring.
The oil giants argue that time is needed for gas prices in America to decrease due to the lag between crude oil and product prices, as well as due to low inventories in most locations, including the United States.
U.S. Gas Prices: Declining but Still High
Patrick De Haan, head of oil analysis at GasBuddy, reported that the national average gas price in the U.S. on July 4 was $3.755 per gallon, down $0.81 from its peak in May but still $0.65 higher than at the same time last year.
Gas prices have fallen from the four-year high of $4.50 per gallon in early May and are expected to continue declining as traffic through the Strait of Hormuz gradually returns to normal.
| Time Period | Average Gas Price (USD/gallon) | Change from May | Change from Year Ago |
|---|---|---|---|
| Early May | 4.50 | - | - |
| July 4 | 3.755 | -0.745 | +0.65 |
Trump Administration Heavily Criticizes Big Oil
The decline in gas prices is not fast enough in the view of President Trump and his administration, who face a critical test of their policies in the November midterm elections.
In late June, President Trump began a fierce attack against Big Oil for price increases, demanding that prices drop "immediately" to around $2.50 per gallon. Since late June, Trump has ordered the Department of Justice to investigate potential illegal price gouging at gas stations, and the DOJ has called on state law enforcement agencies to join investigations into alleged illegal price increases.
Industry Explains and Prepares for Allegations
Meanwhile, the industry is trying to explain to the public and officials why gas prices are decreasing more slowly than crude oil prices, and preparing for additional price-gouging allegations from the administration.
"Refiners don't set the retail price of gasoline, and crude oil is just one - albeit the largest - input into the overall fuel cost," the American Fuel & Petrochemical Manufacturers said in June, suggesting that the President could and should change the Renewable Fuel Standard, which makes supplying fuel to the U.S. market more expensive.
"There is a lag between oil prices and when that shows up at the gas pump, but we expect prices to decrease as things continue to normalize," Chevron CFO Eimear Bonner told CNBC in late June.
"Being the 'devil' is not particularly enjoyable," an oil company executive told Reuters. "But we need to educate officials that this is a cyclical industry and no one cares when the market turns and we're taking all the risks."
Conclusion: The Profit Cycle of Big Oil
In the current cycle, major oil companies are expected to report explosive profits in the second quarter, as they always do when oil prices spike. This is not the first time, nor will it be the last, that oil companies are accused of ripping off consumers at gas pumps while earning excessive profits.
While Q2 profits may be record-breaking, they don't really help the industry in its conflict with the U.S. Administration over still-high gas prices. But in this cyclical industry, companies generate massive profits whenever prices spike and volatility becomes extreme.