Oiling The Wheels

Image source: Warut Prathaksithorn - Shutterstock

What's going on?

On Friday, $150 billion French oil and gas giant Total and $60 billion Italian oil company Eni reported better-than-expected third-quarter results, boosted by – drum roll – higher oil prices.

What does this mean?

A big part of these companies’ businesses is finding oil around the world and then getting it out of the ground – a.k.a. “exploration and production”. Companies spend big sums upfront to retrieve the black gold from hard-to-reach places, and then aim to sell it on at a profit. So when the oil price rises, as it’s done this year, it’s ka-ching for Total – which grew its profit by almost 50% more than a year ago.

The same’s true for Eni, except it told investors it’d produce less over the remainder of the year. Gas is harder to come by in certain countries for Eni, but thanks to the oil continuing to flow, its annual profit shouldn’t suffer too much.

Why should I care?

The bigger picture: Every high has a low.

The price of a barrel of oil breached $80 in September – but, like markets overall, it’s been sliding back ever since, falling by about 10% in October. In a roundabout way, Saudi Arabia’s seemingly bowed to the US’s demands for lower oil prices by saying it’ll keep markets supplied through any disruptions – and that it believes supply could outstrip demand by the end of the year.

For markets: Cashing in and hunkering down.

Oil companies have been using high oil prices and profits to their shareholders’ advantage by buying back their shares. Total’s planning to buy a total of $1.5 billion of Total stock this year – signaling confidence in its future prospects to investors, but also pushing its share price up by way of increasing demand for the stock. The company’s keeping a watchful eye on the future, however: Total’s in the midst of a cost-cutting plan to prevent it being caught offside by any future declines in oil prices.

Originally posted as part of the Finimize daily email.

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