In theory, a third Gulf War should be a huge boon for Big Oil. Most analysts in January expected Brent crude, the global oil-price benchmark, to average $60 a barrel in 2026. It ended the first quarter at $118; Refined products still grew rapidly. With most Gulf oil stranded behind the Strait of Hormuz, exports from the US, Africa and Brazil have increased. So Western majors must collect fatter margins on each barrel – and they must also sell more.
In volatile markets, traders can make huge profits by taking advantage of price discrepancies. (pexel)
British giant Shell’s share price has increased by 4% since the war began; Its larger European rivals, TotalEnergies, BP and Eni, are up 15-17%. But Chevron and ExxonMobil, America’s twin companies, are down 1% and 3% respectively. It turns out that the impact of the war on Western countries is uneven. Q1 results released in recent days point to three reasons: hedging positions, trading profits and the location of production assets.
Chevron and Exxon reported net income of $2.2 billion and $4.2 billion in the three months to March 31 – down 37% and 46%, respectively, from a year earlier. These sharp declines are largely an accounting illusion. Oil-and-gas sales are usually agreed upon a few weeks or months before delivery. To protect against price fluctuations, big companies buy hedges—contracts that pay out in the interim if oil prices fall. When prices rise, the value of the hedges decreases, causing paper losses. That amount was $2.9 billion for Chevron and $3.9 billion for Exxon in the quarter.
Those markdowns will be offset by higher revenues when the sale closes. But US rules require companies to recognize hedging losses immediately, not upon delivery. Furthermore, US producers generally purchase more price protection than European rivals. Exxon and Chevron’s first-quarter hedging losses were unusually large, but if prices continue to rise, hedging will have a greater impact on their earnings than their competitors.
At the same time, European companies are reporting business profits that are still lower than US companies. Because they are unable to rely much on domestic production, Europe’s big companies have spent decades building huge trading desks that employ hundreds of people. These desks don’t just hold physical items; They buy and sell crude, refined products and gas to profit from differences in prices across sectors and over time. For example, BP trades about 12 million barrels of oil per day, about 11 times its production.
In volatile markets, traders can make huge profits by taking advantage of price discrepancies. The segment that hosts BP’s trading unit earned $2.2 billion in the first quarter, up from almost nothing a year earlier. Division housing totals earned $1.6 billion, five times more than the same period in 2025.
In recent years American majors have tried to catch up. Kim Fustier of HSBC, a bank, says the Gulf crisis shows how far Chevron has come. It is increasing its own production rather than relying on third-party traders to put barrels through its trading arm, where they can earn the highest margins. The company expects to handle more than 40% of its crude next quarter – double last year’s share – to help keep its refineries in Asia, where the fuel is in short supply, from being used for more than 80%.
Exxon appears to be lagging behind. To make matters worse, its operations are being particularly affected by the Strait of Hormuz closure. About a fifth of its oil and gas production is located in the Middle East, one of the highest exposures among the majors (see chart). Exxon pumped the equivalent of 4.6 million barrels per day (b/d) in the first quarter, down from 5 million in the previous quarter. If the Strait remains closed until June, the company says its output will fall to 4.1m-4.3mb/d. Both Exxon and Chevron say they have no plans to boost investment in US shale basins to take advantage of higher prices.
The longer the war continues, the more the fortunes of the chiefs may change. These could increase further if Donald Trump bans fuel exports, which analysts believe is possible if gasoline reaches $5 a gallon in the US. That would deepen the discount to Brent, the US’s key crude grade West Texas Intermediate, and prevent domestic refiners from selling at global prices, cutting into US companies’ upstream and downstream profits. Mr. Trump, usually a cheerleader for big oil, is getting desperate. The American heads of state await his next move with increasing fear, baby, fear.
