October 16, 2024 [Bloomberg]- Crude may be back near $80 a barrel, but major oil companies have just given a reminder of how October’s rally is built on shaky foundations.

Shell Plc and BP Plc published third-quarter trading updates this week, and both commented on the weakness of a key part of their businesses: refining.

On Monday, Shell said the margin earned for processing crude sank by 29% in the period. Its chemicals division — also a bellwether for the strength of the wider economy — expects to report a “marginal loss.” Strong gas production was one of a few bright spots.

BP followed on Friday with another warning flag: an increase in its net debt. This core metric has fallen in recent years — from $40 billion in 2020 to about $23 billion at the end of the second quarter — as high energy prices boosted profits.

Now, feeble refining income has halted the downward trend, while a change in the timing of asset-sale payments was also a factor.

These aren’t just issues for the European majors. On Oct. 3, Exxon Mobil Corp. said lower crude prices and poor refining margins would reduce earnings by $1.6 billion quarter-on-quarter.

Profits from processing are closely tied to demand for road fuels, so the decline indicates broad weakness in the global economy — notably in China, but also in the US and Europe.

True, much has changed since the end of the third quarter. Beijing has taken steps to stimulate a faltering economy, though market movements suggest investors remain unconvinced about the scale of the assistance.

On the supply side, jitters about the risk of a wider conflict in the Middle East have pushed oil prices up about 10%.

Either of those drivers could send crude — and the majors’ profits — higher in the fourth quarter.

But if Iran and Israel step back from the brink of all-out war, this week’s company reports show there’s little else around to support the market.