Aramco posts highest net income since 2022 on war premium it doesn't control

Aramco posted its strongest quarter since 2022 and beat every analyst on the tape. The company pumped a quarter less oil than a year ago but sold it amid a war that has stripped supply from the market and lifted its average realized crude price to USD 108.1 a barrel.

The headline carries two different numbers. Reported net income for 2Q rose 44% y-o-y to SAR 122.6 bn (USD 32.7 bn), according to Aramco’s press release (pdf). Meanwhile, adjusted net income, the figure Aramco and the sell-side track, rose 33% to USD 33.4 bn, ahead of some USD 31.6 bn consensus. Realized crude averaged USD 108.1 a barrel, up about 62% y-o-y and carrying a record premium of over USD 10 a barrel to Brent. This price surge was enough to more than offset a production decline to 9.5 mn barrels of oil equivalent per day, down from 12.8 mn bbl / d a year earlier.

Why it matters: The windfall is the standout in an otherwise strained fiscal picture. Oil revenue to the government rose 22% in 2Q to nearly USD 50 bn, cutting the quarterly budget deficit to about USD 9.1 bn — the smallest in nearly two years. That comes against an economy in its sharpest contraction since the pandemic, with GDP down 4.8% y-o-y in 2Q. Aramco is underwriting a budget that its own war premium is helping to rescue, even as the same war shrinks the surrounding economy.

Downstream did the heavy lifting on margins. With Strait of Hormuz traffic down to roughly a tenth of pre-conflict levels, Aramco has leaned on its East-West pipeline to move crude to Yanbu on the Red Sea, sustaining exports it says are running near 5 mn bbl / d. Downstream adjusted EBIT roughly doubled y-o-y to USD 6.2 bn on refining margins the company expects to stay elevated through 2H.

Cashflow tells a subtler story. Freecashflow fell 19% y-o-y to USD 12.3 bn, dragged by a USD 13.6 bn working-capital build that CFO Ziad Al Murshed attributed to a timing lag in the government’s domestic price-equalization payments, which is expected to reverse in 3Q. Strip that out and free cashflow was USD 25.9 bn, up 42%. Gearing — a measure of indebtedness — rose to 6.2% at 30 June from 4.8% three months earlier, still the lowest among the majors on Aramco’s own peer comparison. The board held the base dividend at USD 21.9 bn (SAR 82.1 bn), up 3.5% y-o-y, payable 27 August.

What's next?

The workaround is now under fire. The Red Sea route that made the quarter possible is itself contested. The Iran-aligned Houthis declared a blockade on Saudi vessels transiting the Red Sea on 20 July and have claimed attacks on several ships since. Late in the month the militant group struck Aramco sites at Jazan and Yanbu. Nasser said the attacks had no material impact, and Aramco confirmed some facilities were targeted without lasting effect.

The fallback if Bab Al Mandab closes is thinner: The Sumed line through Egypt moves 2.5 mn bbl / d against the pipeline’s 7 mn bbl / d, and routing Asia cargoes around Africa adds 20 to 25 days. The Saudi Defense Ministry said last week it is forming a coalition to protect Red Sea shipping.

ALSO- The premium may not last. US Treasury Secretary Scott Bessent told CNBC an agreement to reopen Hormuz with “freedom of movement” could land within a day or two, sending US crude down about 3%. Nasser is making the opposite case, arguing that even if Hormuz opened today, it would take up to 18 months at 2.1 mn bbl / d to rebuild depleted inventories, keeping demand and prices firm into 2027.

BACKGROUND- This is the third quarter Aramco has reported since Hormuz traffic collapsed after US and Israeli strikes on Iran on 28 February. It has kept projects moving through the disruption, with the Zuluf crude increment and Fadhili gas expansion on track for 2026 and 2027, alongside an agreed sale of its stake in Malaysian JV PRefChem. It also maintained 2026 capex guidance at USD 50-55 bn.

What to watch: whether a Hormuz agreement holds this time. A 17 June MoU to reopen the strait collapsed within weeks over which routes ships could use. If a durable reopening of Hormuz and Bab Al Mandab compresses the war premium, Aramco’s next results could look very different. A tighter Bab Al Mandab makes the export math harder before it gets easier. Aramco reports 3Q on 3 November.