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What’s Driving Oil Prices Down?

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Evan Kelly

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Oil Industry Slammed By Disappointing Earnings, Oil Price Plunge

WTI oil pared losses on Friday morning, breaking with a 6 day streak of losses. U.S. oil production also saw a slight increase, mainly due to higher output in Alaska

 

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(Click to enlarge)

Rough second quarter earnings. The oil industry made headlines this week with their second quarter earnings, revealing painful numbers from the three-month period that saw shrinking refining margins even while oil prices rose. The 80 percent rally in oil prices helped to bring some revenues back during the quarter, but oil prices are still very low compared to previous years. The majors all held onto their dividends, but that comes at the cost of rising debt. They are biding their time for now, cutting spending, selling assets, and taking on more leverage, hoping to ride out the storm. By and large, most companies disappointed, and saw their share prices tumble after reporting. Here is a quick rundown of second quarter earnings from some of the top oil companies.

• Eni (NYSE: E): Q2 EPS of -€0.27
• ExxonMobil (NYSE: XOM): Q2 EPS of $0.41 (misses by $0.23)
• Chevron (NYSE: CVX): Q2 EPS of -$0.78 (misses by $1.10)
• ConocoPhillips (NYSE: COP) Q2 EPS of -$0.79 (misses by $0.18)
• Total (NYSE: TOT) Q2 EPS of $0.90 (beats by $0.16)
• Royal Dutch Shell (NYSE: RDS.A) Q2 EPS of $0.13
• BP (NYSE: BP): Q2 EPS of $0.23 (misses by $0.05)
• Pioneer Natural Resources (NYSE: PXD): Q2 EPS of -$0.22 (beats by $0.12)
• Suncor Energy (NYSE: SU) Q2 EPS of -$0.36 (misses by $0.15)
• Anadarko Petroleum (NYSE: APC) Q2 EPS -$0.60 (beats by $0.20)

ExxonMobil and Chevron down. ExxonMobil’s (NYSE: XOM) earnings fell by 59 percent from a year earlier, and Chevron (NYSE: CVX) posted its worst quarterly loss since 2001. The earnings from the two oil majors rounded out the week of terrible earnings for the world’s top oil companies. Exxon, normally a company with a steady share price and reliable earnings, missed estimates by quite a bit, sending its share price down more than 4 percent on Friday.

Oil prices back down. The poor showing for much of the oil industry is all the more worrying because the second quarter actually exhibited some improvement in crude prices, a development that has since reversed itself. With a glut of refined products, refining margins are worse than they have been in years. Now, if crude sees another sustained downturn, the financials for most oil companies will be even worse in the third quarter. The latest weekly data from the EIA did not help matters, showing a surprise uptick in crude oil inventories for the first time in months, as well as another small increase in gasoline stocks. Oil is closing out the week just a bit above $40 per barrel.

Rally to resume later this year. Not everyone is down about oil prices. A Reuters survey found that many analysts expect the rally to resume later this year due to robust demand, which will help shrink the supply overhang. The survey of 29 economists and analysts expect Brent to average $45.51 this year, which is up slightly from last month’s survey, and $3.55 per barrel higher than the actual average for prices so far this year. Analysts expect steadily rising demand to narrow the surplus, which should push up crude prices in the third and fourth quarters.

Dollar weakens, helping crude. Oil prices stopped sliding at the end of the week due to a falling U.S. dollar. The Bloomberg Dollar Spot Index fell to its lowest level since July 1, after weak economic growth figures from the United States. A weaker dollar provided a slight boost to crude prices, following several days of large losses. "The dollar has weakened a lot and we’re at a technically supportive" level, Bill O’Grady, chief market strategist at Confluence Investment Management, said in an interview with Bloomberg. "We’re probably due for at least a bit of a recovery." On a related note, Goldman Sachs wrote this week that the largest threat to oil prices comes not from a glut of crude oil or refined products, but from a strengthening U.S. dollar. Concerns over global economic growth, the stability of the euro, and the potential rate hike from the U.S. Federal Reserve are providing strength to the greenback, which is bad news for oil prices.

Pioneer says U.S. shale competitive with Saudi Arabia. Pioneer Natural Resources (NYSE: PXD) says that it has cut its oil production costs in the Permian Basin to $2 per barrel, a cost structure that rivals the cheapest sources of oil in the world, including in Saudi Arabia. "Definitely we can compete with anything that Saudi Arabia has," CEO Scott Sheffield said in Pioneer’s latest earnings call. "My firm belief is the Permian is going to be the only driver of long-term oil growth in this country. And it's going to grow on up to about 5 million barrels a day from 2 million barrels,” Sheffield said, adding that such a scenario is possible even if oil trades at $55 per barrel. He is not so bullish on the Bakken or the Eagle Ford, saying that those basins will not bounce back to their high-watermarks from last year.

Natural gas prices up. Natural gas prices in the U.S. jumped by the most in seven months after the EIA reported a smaller-than-expected build in inventories. Stockpiles increased by only 17 billion cubic feet last week, a small increase for this time of year – hot weather has led to a spike in demand. The modest increase in inventories allayed fears of oversupply, pushing up hub prices by 8 percent to $2.87 per million Btu.

Statoil purchases offshore block from Petrobras for $2.5 billion. The Norwegian oil company Statoil (NYSE: STO) paid Petrobras $2.5 billion for an offshore block in the Santos Basin off the coast of Brazil, which could hold somewhere between 700 million and 1.3 billion barrels of oil equivalent. Statoil believes it acquired the asset at a bargain, purchasing it at the bottom of the oil price cycle while asset valuations are still depressed. “It’s a world class asset,” Executive Vice President Tim Dodson told Bloomberg. “We’re acquiring this on very competitive terms.”

By Evan Kelly of Oilprice.com

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  • Joseph Clark on September 06 2016 said:
    You guys always forget, purposly probably, the huge amounts of reserves, not just stockpiled, but what is in the ground, geologists paid to keep their mouth shut, like the panhandle of Idaho, 92 of 95 holes punched in the early 80s, hit, no pump yet, same all over, massive fields, kept hush hush, , the fields reopened with fracking, true price without speculation will be the invisible hand

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