Key Points:
- Exxon Mobil and Chevron saw their first-quarter profits fall on paper despite a massive spike in global crude oil and gasoline prices.
- A military conflict involving the United States, Israel, and Iran essentially closed the Strait of Hormuz, making physical oil deliveries impossible.
- Exxon earned $4.18 billion, and Chevron earned $2.21 billion, both beating Wall Street expectations for adjusted earnings.
- The average price of gasoline in the United States hit $4.39, pushing inflation higher and forcing global airlines to cancel flights.
The two largest oil companies in the United States took a surprising financial hit during the first quarter. Even though crude oil and gasoline prices skyrocketed over the past three months, Exxon Mobil and Chevron reported major drops in their official profits. However, this setback only exists on paper. The financial losses stem directly from routine market hedges that backfired after the United States and Israel launched attacks on Iran in late February.
At the start of the year, energy prices looked weak and depressed. To protect their bottom lines from sudden market swings, both Exxon and Chevron set up financial hedges. This standard industry practice allows companies to lock in prices in advance and predict their future costs. Unfortunately, the sudden war in the Middle East ruined this careful financial planning.
The conflict effectively closed the Strait of Hormuz, a critical waterway off the coast of Iran. On a normal day, roughly 20% of the world’s oil flows through this narrow passage. Since the war started in late February, military actions have choked off this vital supply route. Because the oil companies cannot physically deliver the crude oil through the strait, they cannot officially record the financial gains from their earlier hedges.
Exxon Mobil felt the heavy impact of these trapped shipments. For the period ending March 31, the company earned $4.18 billion, which equals $1 per share. Just one year earlier, Exxon pulled in a massive $7.7 billion, or $1.76 per share. The energy giant lost almost $4 billion during the quarter simply due to the unfavorable timing of its hedges.
Despite the paper losses, Exxon still outperformed expectations. When accountants removed the one-time impacts of the delayed shipments, the company earned an adjusted $1.16 per share. That number beat Wall Street projections by 9 cents. Furthermore, Exxon generated a staggering $85.14 billion in total revenue, easily surpassing the $81.49 billion predicted by financial analysts. Overall production did drop slightly, falling to 4.6 million oil-equivalent barrels per day compared to 5 million in the previous quarter.
Exxon Chief Executive Officer Darren Woods spoke to investors during a conference call to explain the chaotic situation. He warned that the world has not yet seen the true consequences of this unprecedented disruption in oil and natural gas supplies. Woods noted that markets remain somewhat stable only because ships already had massive amounts of oil in transit on the water before the strait closed. Once those floating inventories dry up, the market will face a much harsher reality.
Chevron faced a very similar financial scenario. The company reported a first-quarter profit of $2.21 billion, or $1.11 per share. A year ago, Chevron earned $3.5 billion, or $2 per share. Several specific issues dragged down these numbers. Chevron absorbed a $360 million net loss related to a legal reserve and lost another $223 million due to foreign currency exchange rates.
Just like its main rival, Chevron easily beat the experts when it came to the core business. The company posted an adjusted profit of $1.41 per share, blowing past the 92 cents per share expected by Wall Street. Chevron also reported a robust $48.61 billion in total revenue, which topped financial forecasts. Other drillers shared similar success stories this week, with BP announcing that its first-quarter profit more than doubled.
While the oil giants navigate complicated financial rules, everyday people feel real pain at the pump. Gasoline prices in the United States reached new multiyear highs this week. The national average price of gasoline hit $4.39 on Friday, climbing more than 8% over the past seven days alone. This spike creates deep frustration for travelers, households, and businesses that rely heavily on affordable energy.
The surging cost of fuel drives up inflation across the entire economy. The United States Department of Labor reported that inflation rose sharply in March, fueled by the largest single jump in gas prices seen in six decades. Lower-income and middle-income families now struggle to pay for necessities. The crisis also damages the travel industry. Airlines around the world recently began canceling flights as the war in the Middle East strains jet fuel supplies and drives ticket prices skyward.
Oil prices did ease slightly on Friday, offering a tiny glimmer of hope. This slight drop helped steady the global stock markets that remained open during the May Day holiday. However, as long as the Strait of Hormuz remains blocked, consumers and energy companies will continue to face extreme uncertainty.
