The flames of war in the Middle East have ignited profits of $100 per barrel! Saudi Aramco, the oil giant, saw a 33% increase in profits in Q2, but the Red Sea shipping sector is facing a crisis.

Saudi Aramco, the global oil and gas giant, reported a substantial 33% increase in second-quarter profits, benefiting from a surge in international oil prices driven by the ongoing U.S.-Iran conflict since February. The company has maintained large-scale oil exports from the Red Sea port of Yanbu by utilizing oil pipelines that bypass the Strait of Hormuz. In terms of earnings data, the adjusted net profit according to a performance statement released on Tuesday rose sharply from $25.2 billion in the same period last year to $33.4 billion, exceeding analysts' profit expectations of $31.1 billion compiled by Bloomberg. The complete blockade of the Strait of Hormuz has triggered the largest oil supply disruption crisis in human history, with the benchmark international oil priceBrent crude futuresaveraging nearly $97 per barrel during the quarter. Aramcos direct selling price for crude oil in the second quarter reached $108.10 per barrel, nearly doubling compared to the same period last year. This persistently high oil price has driven significant profit increases for North American oil and gas giants Chevron and ExxonMobil, as well as Saudi Aramco, primarily due to the company's shift of most of its exports to the Red Sea rather than the Strait of Hormuz. However, the company now faces heightened risks to growth as the Iran-backed Houthi armed forces threaten to continue attacking tankers using that shipping route. As for the latest U.S.-Iran and Middle East situation, diplomatic and military threats appear to be escalating simultaneously. As of August 4, Trump claimed that U.S.-Iran negotiations were underway and warned Iran that this was their "last chance" before possibly facing a "decapitation" strike; he had previously canceled an authorized "large-scale attack." Iran, however, denied that it was engaged in or planned direct negotiations with the U.S., stating that discussions regarding the management of the Strait of Hormuz were currently only occurring through Oman. Meanwhile, a cargo ship reported being struck by an unidentified object near the Strait of Hormuz, with only six vessels passing through the Strait on that day, indicating that actual shipping remains far from normal. As a result, the market is in a highly bifurcated state: if negotiations lead to the reopening of the Strait of Hormuz, war premiums may rapidly erodeon August 3, Brent crude dropped around 7% to $83.77 due to hopes of peace talks; if the U.S. executes its "decapitation" threat and Iran continues to leverage Red Sea and Gulf energy infrastructure in negotiations, oil prices, shipping rates, and energy stock profit expectations could surge again. The Middle East war premium has ignited a "cash-generating engine" for oil, yet the Red Sea route has become a new front of risk. Amin Nasser, CEO of Saudi Aramco, stated in a statement that the company has relied on "strategic infrastructure such as east-west pipelines, storage capacity and multiple export terminals" to ensure business continuity during this round of warfare in the Middle East. He indicated that this has helped the company "maintain oil production and exports while advancing key projects." Saudi Aramco reported that its critical infrastructure was targeted in multiple military attacks in July, and the company is still assessing the impact of these attacks on its operational model and financial performance. As of the end of the quarter, the attacks had not resulted in any significant negative effects on its performance or operations. The state-owned Saudi Aramco also benefited from soaring prices of petroleum products like diesel and aviation fuel, which have frequently outpaced crude oil price increases. Even with a temporary peace agreement reached between the U.S. and Iran, Brent crude prices briefly fell below $75 per barrel, yet refined oil prices remained at historical highs. Saudi Aramco operates several large refineries along the Saudi coastline of the Red Sea. The company previously stated in a presentation that it is continuing to maximize exports of these fuels to take advantage of higher prices and profit margins. However, as Houthi attacks on vessels escalate, the risks faced by these exports are increasing. Such attacks have opened a new front in the war and threaten the transportation of millions of barrels of Saudi crude oil and refined products. Should Red Sea supply face serious and prolonged interruptions, the global oil supply market would be further impacted; meanwhile, international oil prices would be driven higher as maritime traffic through the Strait of Hormuz remains severely restricted. The company anticipates that the replenishment of global oil inventories will provide strong support for demand. In the second quarter, the average selling price of Saudi Aramco crude oil was approximately $108.10 per barrel, compared to about $66.70 per barrel a year prior. Liquid production decreased 28% to 7.57 million barrels per day, while natural gas production fell by 16%. The company maintained its base dividend at around $21.9 billion, a payment that is crucial for Saudi Arabia's public finances and maintaining international capital's bullish confidence in the Saudi stock market. Saudi Aramcos debt-to-equity ratioa measure of the companys indebtednessrose from 4.8% at the end of March to 6.2% by the end of June. Free cash flowremaining cash flow after deducting capital investments and expenseswas approximately $12.3 billion at the second quarter, insufficient to cover dividend expenditures. A brief peace agreement reached in mid-June allowed Gulf countries to temporarily increase export volumes through the Strait of Hormuz. Despite the latest rounds of intensifying geopolitical conflicts again restricting this route, the Saudi-led OPEC+ continues to agree to ramp up production, further unwinding previous long-term crude oil production restrictions. Given that oil-related production and export activities in the Gulf region remain significantly constrained, this action is currently more symbolic; however, it will ultimately enable Saudi Arabia to raise its daily production to nearly 10.5 million barrels. The blockade of the Strait of Hormuz and threats to Yanbu transportation persist, yet oil giants like Saudi Aramco continue to reap the benefits of high oil prices fueled by conflict. Saudi Aramcos financial results reflect a distinct characteristic of "strong profits, weak cash conversion. In addition to the adjusted net profit of $33.4 billion, the second quarter GAAP net profit was $32.69 billion, a year-over-year increase of 44%; operating cash flow was $25.4 billion, while free cash flow was $12.26 billion, a decrease of approximately 19.5%, primarily due to the impact of $13.6 billion in working capital occupation; capital expenditure rose 7% year-over-year to $13.17 billion, and ROACE increased from 20.3% to 22.1%. The companys base dividend payment of $21.89 billion means that during the quarter, free cash flow could only cover about 56% of the base dividend, with the debt ratio rising from 4.8% at the end of March to 6.2% at the end of June. In the first half of the year, adjusted profits grew approximately 29% to $67.18 billion, but free cash flow decreased by about 10% to $30.9 billion. Thus, while high oil prices significantly improved the profit statement, they have not fully translated into more abundant distributable cash. On the operational front, the company maintained a reliability rate of 98.4% in supply, with the Zuluf expansion project expected to be completed by 2026 and the Fadhili expansion and Jafurah phase two planned for commissioning in 2027, supporting medium-term growth for crude oil and natural gas. Combining the earnings announced last Friday by the two North American energy giants, ExxonMobil and Chevron, the fundamental conclusion about energy stocks is very clear: the high oil prices and soaring refining margins in the second quarter of this year provided substantial earnings benefits for integrated oil giants. ExxonMobil achieved a GAAP profit of $14.5 billion, adjusted profit of $14.7 billion, operating cash flow of $23.6 billion, and free cash flow of $17.2 billion, with upstream adjusted profits reaching $9.19 billion and energy product business revenue at $4.1 billion, also setting a record for diesel production in the second quarter. Chevrons net profit was $12.1 billion, nearly quadrupling at about $2.5 billion compared to the same period last year, with adjusted profit at $12 billion, operating cash flow of $22.6 billion, and adjusted free cash flow of $15.4 billion, with upstream profits up 200% year-over-year, and global production reaching about 4 million barrels of oil equivalent per day; refining business profits increased to $4.9 billion. The distinction lies in the fact that Chevron has a relatively small exposure to production in the Middle East and therefore more fully benefited from price increases; both Saudi Aramco and Exxon faced disruptions in the Middle East due to shutdowns or logistical disturbances. This means that rising oil prices are beneficial for all three, but the geographical diversification, refining configurations, and shipping exposures determine the "purity" of the benefits. The continued threats to Yanbu port and the crucial Red Sea energy route for Saudi energy transport from the Houthi armed forces mean that Saudi Arabia's previously utilized "strategic backup route" to bypass the Strait of Hormuz is also beginning to come under pressure. The international oil market has upgraded from a single risk of energy transportation through the Strait of Hormuz to a dual bottleneck risk encompassing both the Strait of Hormuz and the Bab el-Mandeb Strait. Six Saudi supertankers have already turned around in the Gulf of Aden, routing around the Cape of Good Hope, thereby increasing travel time by at least 25 days, and the London insurance market has extended the high-risk area in the Red Sea; Houthis have also claimed to have attacked crude oil transportation facilities connecting eastern Saudi oil fields to Yanbu port. Nevertheless, loading activities at Yanbu are still ongoing, and Aramco's supply reliability remains high, suggesting that the current situation involves more risk premiums, insurance costs, and extended transport cycles, rather than a full interruption of Yanbu exports. For oil prices, if Red Sea transportation continues to be obstructed, it will reduce effective capacity, push up the differential prices of diesel and jet fuel, and lead to a notable upward convexity in oil prices; for the fundamental outlook of Saudi Aramco, it creates a double-edged sword of "increased selling prices benefiting profits, while logistics costs and risks associated with crude oil exports through ports harm cash flow."