Equinor's Q4: A Price-Driven Earnings Drop in a Tightening Commodity Balance

Equinor's fourth-quarter results present a clear tension between price pressures and operational strength. The company reported an adjusted net income of $2.04 billion, a sharp decline from the $3.64 billion earned a year earlier. This translates to an adjusted earnings per share of $0.81. The primary driver of this drop was a $626 million net impairment charge across its portfolio, coupled with a significant squeeze in realized prices. Liquids prices fell to $58.6 per barrel from $77.7 per barrel a year ago.

Yet, production tells a different story. Despite the earnings headwinds, Equinor's operational engine kept running. Total equity production rose 6% year on year to 2.20 million barrels of oil equivalent per day. This growth was fueled by new fields like Johan Castberg and Halten East, along with higher U.S. onshore gas output. The company achieved a record annual production level of 2,137 mboe per day.

This sets up the central question for the commodity balance. The earnings drop is a classic story of price weakness hitting a resilient producer. The company is delivering more barrels, but the price per barrel has fallen sharply, and one-time charges have added to the pressure. The key for investors now is to assess whether this price decline is a temporary dip or the start of a longer-term shift in the supply-demand equation. The production growth shows Equinor's ability to scale output, but its profitability remains hostage to the commodity price.

The Commodity Balance: Supply, Demand, and Inventory Flows

The earnings drop at Equinor is a symptom of a broader market imbalance. For the full year 2025, the average price for Brent crude settled at $69 per barrel, the lowest annual level since 2020. This reflects a persistent condition where global supplies have consistently outpaced demand. The situation intensified in the final quarter, where West Texas Intermediate averaged $59.64 per barrel, a steep decline from $70.69 a year earlier. This sharp price slide was driven by a clear oversupply, with global production of crude and liquid fuels estimated to have outpaced consumption throughout the year, leading to implied stock builds of more than 2.5 million barrels per day in the last two quarters.

In this context, the role of inventories becomes critical. While rising stockpiles typically act as a drag on prices, the data shows a key moderating factor: crude oil inventory builds in China likely limited the full force of the price decline. These builds essentially acted as a source of demand by removing barrels from the global market, creating a temporary buffer. This dynamic is a classic example of how inventory flows can support prices during periods of fundamental weakness.

The bottom line is that this inventory support is a fragile, short-term mechanism. It delays a deeper price collapse but does not resolve the underlying oversupply. For producers like Equinor, this sets up a precarious path to future profitability. Their ability to grow production is a strength, but it operates against a backdrop of weak prices and a market where stock builds are the norm. The sustainability of the current price level hinges on whether these inventory draws can continue to absorb excess supply, or if they will eventually reverse, unleashing the full weight of the oversupply that has defined 2025.

Portfolio Management and Operational Resilience

In the face of this price pressure, Equinor is executing a clear strategy to strengthen its financial footing. The company is taking decisive steps to control costs and discipline capital, aiming to bolster free cash flow and maintain competitiveness. For the 2026-2027 period, it has reduced its organic capital expenditures outlook by $4 billion. This move, combined with a target to reduce operating costs by 10% in 2026, forms the core of its cost-control playbook. These actions are designed to insulate the business from lower commodity prices and ensure that growth remains profitable.

This focus on efficiency is complemented by a resilient portfolio. While upstream earnings were pressured, other segments delivered strong performance. The Marketing, Midstream, and Processing division benefited from robust gas trading and a favorable price review, providing a critical offset. This demonstrates the value of diversification within the integrated model. Even as liquids prices fell, the company's ability to generate cash from its broader operations helps to smooth the earnings cycle.

The underlying operational strength is evident in the production numbers. Equinor achieved a record full-year 2025 production growth of 3.4%, reaching 2,137 million barrels of oil equivalent per day. This growth, driven by new fields and high-grading, shows the portfolio's resilience. The company is not merely weathering the storm; it is continuing to scale output, which is essential for long-term value creation. The strategic priorities-developing the Norwegian continental shelf, focused international growth, and building an integrated power business-are guiding this capital allocation.

The bottom line is that Equinor is managing through the downturn with a dual focus: tightening its belt while maintaining its growth trajectory. The capital expenditure cut and cost reduction targets are direct responses to the weak price environment, aimed at protecting cash flow. Meanwhile, the record production and strong midstream performance provide a tangible buffer. This balanced approach-aggressive cost discipline paired with continued operational execution-positions the company to emerge from the current commodity imbalance with a stronger, more competitive portfolio.

Catalysts, Risks, and What to Watch

The path from Equinor's earnings drop to a sustainable recovery hinges on a few key catalysts and risks that will test the commodity balance. The immediate forward-looking factor is the OPEC+ decision in March on whether to resume monthly output increases after a first-quarter pause. The group's call will directly influence the supply trajectory that has defined 2025's oversupply. Any delay or reversal in planned hikes could provide a near-term floor for prices, while a swift return to higher production would reinforce the current pressure.

Geopolitical developments in the Middle East also act as a volatile catalyst. Recent incidents, like the downing of an Iranian drone near a US carrier and harassment of a tanker in the Strait of Hormuz, have already unsettled markets and pushed Brent toward $68. While diplomatic channels remain open, these tensions serve as a reminder of the region's power to disrupt flows and support prices. Their persistence or escalation will be a key variable in the near-term price equation.

The primary risk is that the current price environment persists, undermining the $69 annual average benchmark for Brent. This average, the lowest since 2020, reflects a market where global production consistently outpaces demand. If inventory builds in China and other key markets fail to absorb the surplus, prices could drift lower, squeezing margins and making Equinor's cost discipline even more critical.

For investors, the signals to watch are twofold. First, monitor the company's ability to meet its 2026 production growth target of around 3%. This is the operational proof point that Equinor can continue scaling output even as prices are pressured. Second, track its progress toward a return on average capital employed of around 13% for 2026/27. This metric will reveal whether the company's cost cuts and capital discipline are successfully translating into profitable growth.

These metrics will show whether the commodity balance is shifting. Strong production growth alongside a rising return on capital would signal that Equinor is navigating the oversupply period effectively, building value even in a weak-price environment. If production falters or returns fall short, it would confirm that the earnings decline is part of a longer-term trend, where the market's supply glut outweighs even the most resilient producers.