The recovery of oil and gas commodity markets and improved company performance continued in the second quarter of 2021 with oil demand and OPEC+ discipline resulting in a steady reduction in inventories and an increase in crude oil prices.
Brent crude averaged US$69 a barrel in the second quarter, up 13% from the previous quarter and twice the average of a year ago. Henry Hub averaged US$2.95/MMBtu, down from US$3.50/MMBtu in the first quarter as prices normalized after the extreme cold, but were up 50% from the beginning to the end of the quarter, a trend that has continued into Q3. International gas markets strengthened, with northern Asia LNG prices averaging nearly US$10/MMBtu, driven by strong growth in Chinese power demand, European inventory rebuild and reduced hydroelectric output in Brazil.
In the downstream segment, international travel and the demand for aviation fuel remain depressed with no end in sight as COVID-19 variants continue to vex public health authorities. A rebound in global GDP, particularly demand for plastic from the automotive industry, boosted petrochemical segment earnings.
Good news – and hard questions
Earnings reports for the second quarter of 2021 brought mostly good news. The majors reported a combined net income of US$18.8 billion, 9% lower than the previous quarter, but a complete turnaround from net losses of US$58 billion in the same quarter of 2020. Companies reported the highest combined cash flows in the last 10 quarters at US$52.1 billion – 27% higher than the previous quarter and more than four times year-ago levels. A vigorous debate about how to use revived cash flows is sure to ensue as companies face the choice between returning cash to shareholders, investing in the core hydrocarbon business and growing emerging alternative energy ventures.
More than ever, financial questions, which accounted for 65% of the total, dominated earnings calls. Analysts frequently queried management on the trade-off between additional capital returns and new investment in core and emerging businesses. This is a stark contrast to the previous quarters, when companies were cutting capital investment and dividends and suspending share buyback programs.