Era of cheap oil will test resilience of oil giants as profits drop
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3 weeks ago
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- Crude oil futures rise for a third straight session Friday, but gave back most of their early gains that had followed reports Iran was planning another attack on Israel.
- An advisor to Iran’s Supreme Leader Ayatollah Ali Khameni official said the country has the capacity to produce nuclear weapons and is prepared to change its policies on using them if faced with an existential threat, NBC News reported.
- Oil prices had built a premium based on bets for an escalation and supply disruption in the Middle East, but since that has not happened, prices may have pared back some gains on “profit-taking from day traders,” according to Tariq Zahir at Tyche Capital Advisors.
- Prices also were supported by expectations that OPEC+ could postpone December’s planned oil production increase by a month or more on concerns over soft oil demand and rising supply; recent reports said a decision could be made as early as next week.
- But weighing on prices was a U.S. Energy Information Administration report that domestic drillers pumped a monthly record 13.4M bbl/day in August, with annual output reach a record 13.2M bbl/day this year.
- “Geopolitical tensions have proved to be a temporary boost to oil bulls,” but the global economic outlook and supply-demand dynamics remain comfortably bearish for oil, Swissquote Bank’s Ipek Ozkardeskaya said.
- Front-month Nymex crude (CL1:COM) for December delivery closed +0.3%on Friday to $69.49/bbl, while Brent crude’s (CO1:COM) new January front-month settled +0.4% to $73.10/bbl, for the week, the benchmarks ended down 3.2% and 3.3%, respectively.
- Front-month December natural gas (NG1:COM) finished Friday -1.6% at $2.663/MMBtu, plunging 13.9% for the week, as the injection season draws to a close with weather forecasts still pointing to mild temperatures for the first half of November.
- ETFs: (USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (USOI), (UNG), (BOIL), (KOLD),(UNL), (FCG)
- Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) blamed weaker commodity prices and refining margins for lower profits in Q3, with earnings at Exxon falling 5% from a year ago to $8.6B and Chevron sliding 31% Y/Y to $4.5B; per-share earnings, however, beat Wall Street estimates.
- The oil giants have funneled more than $155B in dividends and stock buybacks to shareholders since oil prices surged in 2022, but in an environment of cheaper oil, a reversal of fortunes may be looming.
- “The largest single factor that we would have seen year over year is just industry price margins… especially both in terms of gas prices and refining margins, coming off of historical highs,” Exxon (XOM) CFO Kathy Mikells said.
- The industry likely will continue to see “downward pressure on prices” if crude demand remains weak in regions such as China, and if OPEC+ moves forward with its production hike, Chevron (CVX) CEO Mike Wirth said.
- But both companies signaled confidence that their cost-cutting and reduced spending have prepared them for the worst.
- Energy, as represented by the Energy Select Sector SPDR Fund (XLE), ended the week -1.9%.