Down, Down, Down For Oil Majors?

By Kishori Krishnan Exclusive To Crude Investing News

All eyes are on oil majors, as they battle refining slump. Though the sector is up 20 per cent, refineries are struggling as demand remains limp and the cost of input – oil – keeps rising.

This quarter’s earnings from oil majors like Exxon Mobil Corp and BP Plc, to be posted this week, will put the focus on their integrated structure. BP reports results next Tuesday, followed by Conoco on Wednesday, Exxon and Shell on Thursday, and Chevron on Friday.

Most firms are banking on rebounding oil prices to offset dismal refining results. The results will bring the focus to the new wells due to come on line in the months ahead.

Few anticipate a dramatic recovery in global demand for oil products next year, so oil majors also face tough decisions on what to do about surplus refining capacity, as do the dedicated refiners such as Valero Energy Corp.

US oil prices hovering above $80 a barrel for the first time in a year is welcome news to oil producers. Last quarter they averaged $68 a barrel, just over half that of a year ago, but 13 per cent above the second quarter.

Exxon

After a tough year for Exxon, whose stock is down 7 per cent in 2009, the Irving, Texas-based giant’s outlook will be especially important.

“We want to make sure the projects in the queue are going as planned, and hopefully there will be production growth in 2010,” said Neal Shah, senior energy analyst with First American Funds in Milwaukee, Wisconsin.

Mirroring the year-on-year price plunge, Exxon, the world’s largest private-sector oil company, is expected to report a 63 per cent drop in profit to $4.94 billion, according to the average on Thomson Reuters.

BP

It is a similar story for BP, with a Reuters poll of six analysts giving an average net profit forecast of $3.2 billion for the quarter, down 64 per cent from the same period in 2008.

Cazenove oil analyst Fred Lucas wrote in a research note that BP’s London-based management might hint at the potential for lower capital expenditure in 2010.

CONOCOPHILLIPS ———–51.97              -0.96
CHEVRON CORP————-76.68               -0.61
OCCIDENTAL PET———-82.15               -1.85
ROYAL DUTCH SHELL-A —–20.80               -0.08
ROYAL DUTCH SHELL-B —–1852.50           +15.00
SCHLUMBERGER LTD ——–65.20               -3.40
EXXON MOBIL CP———- 73.57               -0.87

Shell

Anglo-Dutch giant Royal Dutch Shell Plc , based on the average among some analysts, is expected to show comparable net profit of $2.5 billion, down 69 per cent from a year ago.

“It’s going to differentiate if these supermajors are true supermajors,” said Tina Vital at S&P Equity Research. “The down time is a good time to see what you’re really dealing with.”

A key test will come from their refining businesses, with benchmark margins off 54 per cent on the US Gulf Coast and down 60 per cent in both Northwest Europe and Singapore.

New projects

The topmost question on everyone’s minds – will they, won’t they, allow new projects to take off?

For, Chevron Corp said earlier this month that it saw no improvement in refining margins last quarter. Chevron had a busy third quarter, naming a new chief executive and taking the wraps off plans for a huge natural gas project in Western Australia known as Gorgon.

Like Exxon, analysts on Thomson Reuters see Chevron profits dropping 63 per cent to $2.91 billion, or $1.43 a share, while smaller rival ConocoPhillips is expected to show a 72 per cent drop to $1.42 billion, or 94 cents per share.

Conoco warned this month that its quarterly profit would be hit by weak US natural gas prices, but made waves in the industry and boosted its share price by announcing a few days later plans for $10 billion in asset sales.

Occidental Petroleum Corp , the fourth-largest US oil company, but with no refineries, reported on Thursday a 60 per cent drop in quarterly profit. It offset some of the impact of weaker oil prices by growing production.

Lost appeal?

The crude oil market has lost most of its popularity since it is no longer near $150 per barrel. However, if one takes into consideration the relation between crude and gold there is definitely something brewing.

Most commodities have been reacting to the deflation scare. Crude oil was no exception. Gold did not suffer that much, however, given that it is perceived as a form of money and during deflationary periods “cash is king”.

So, crude oil dropped much more than gold and the gold/oil price combination moved far from any trend observed. Point to note: prices sooner or later tend to reverse to their means.

So, given that the fundamental and technical factors are in place for a substantial rally in the yellow metals, oil is bound to slowly catch up.

Although many commodities declined sharply in 2008, one has to note that we are still in the secular bull market in commodities. The most important commodity – crude oil – has also been hammered and – contrary to gold – did not pass it’s previous highs yet.

Although oil’s underperformance to gold might put the commodities‘ bull market into question, the situation is slowly moving back to the normal state.

Economy recovers

As signs the global economic recovery is gathering pace, investor optimism has been fuelled. China said Thursday that its economy grew 8.9 per cent in the third quarter, building on recent improvements in industrial production, retail sales and commodity imports.

“So far the path of recovery has surprised to the upside,” Barclays Capital said in a report. “The groundwork for a sustainable move into higher price ranges has been laid.”

Olivier Jakob of Petromatrix in Switzerland said that higher oil prices could motivate some producers to increase output.

Black gold has risen 133 per cent off of its lows from February of 2009. This move is a 38 per cent retracement to the highs of last year.

Prices have been consolidating for five months as the fight between bulls and bears has emerged. Currently, the market is breaking out of its five month highs, and attempting to continue its upward trend by trading through the 200 day moving average. The strength and momentum should give the bulls drive to reach for and test the upper 80s.

What will be important here is how strong these levels will hold and if the market can continue at this pace. The market is facing major resistance and bull target of $90.

Clearly, the bulls are out in full force.