Big Oil Profits Forecast to Rise on Iran War Market Turmoil, With Focus Now on How the Cash Will Be Used

International energy markets have grown more volatile over the Iran war, but the world's top oil companies have found an opportunity to earn large profits from exactly that situation. According to a Reuters report, the big oil companies are forecast to see significant growth in profits in the third quarter of this year.

After the United States and Israel attacked, war began in Iran and pressure grew on the international energy supply system. Disruption to shipping through the Strait of Hormuz in particular created uncertainty over oil and gas supplies on world markets.

A huge amount of energy is transported through this important waterway. Fears of supply disruption therefore increased price swings on the market, and energy prices reached their highest levels in many years.

That market volatility has given the big oil companies' trading divisions the chance to earn extra profit. When oil prices move rapidly, trading divisions can increase earnings through buying, selling and supply management.

At the same time, the widening gap between crude oil and refined fuel prices has created the prospect of higher profits in the refining business as well. But because such earnings depend on market conditions, there is uncertainty over whether they will remain at the same level in the long term.

According to data from the London Stock Exchange Group (LSEG), British energy company BP's third-quarter net income could rise by 155 percent compared with the same period last year.

Over the same period, refining profit margins at top companies such as Chevron, ExxonMobil, Shell, BP and TotalEnergies are forecast to rise by as much as three to four times compared with last year. If those estimates prove correct, war-driven market volatility will have a major effect on these firms' financial results.

International energy company Shell has said its refining business margin in the third quarter of this year could reach 42 dollars per barrel. Such an increase in margins will help the company earn more from its refining operations.

French energy company TotalEnergies, meanwhile, expects cash flow from its refining and chemicals business to almost double compared with the second quarter, reaching 4 billion dollars.

US-based ExxonMobil has also signalled extra earnings in the refining business. The company believes high refining margins could raise profits at its downstream, or refining and marketing, business by 4.5 billion dollars compared with the previous quarter. As a result, the big companies now have the prospect of higher earnings not only from production but also from refining, marketing and energy trading.

Alongside the extra profits, however, an important question faces the companies — in which sector will this money be spent? In the past, when oil prices rose, many energy companies invested large sums in expanding production and in new projects.

But in recent years, investors have placed more importance on controlling spending, reducing debt and returning money to shareholders. So even if earnings rise this quarter, discussion continues over whether the companies will return to large-scale spending as before.

Biraj Borkhatariya, an analyst at RBC Capital Markets, believes that when third-quarter results are published, the companies' plans for using the extra cash will become the important issue for investors. So far, ExxonMobil and Chevron have used part of their additional money to repay debt — strengthening their financial position while also increasing their ability to face negative market conditions in future.

In Chevron's case, investors are also watching new projects and business expansion. In particular, the company's investment in Venezuela and progress on extending the joint venture agreement at Tengiz, Kazakhstan's largest oilfield, have become important. Such initiatives could create opportunities to raise production and earnings in future, although spending, political conditions and project delivery risks must also be considered for new investment.

HSBC, meanwhile, believes companies such as Shell and Chevron could increase share repurchase, or buyback, programmes. Through a buyback, a company purchases its own shares from the market. Only after the third-quarter results are published will it become clear whether the extra profit earned in a war market ultimately goes to debt repayment, buybacks or new investment.