Big oil faces glut challenges
August 1, 2016, 11:30 am

Have global markets turned back toward an oil glut? Some investment firms think so [Xinhua]

While oil futures slid further on Monday to $41.12 (US West Texas) and $42.96 (Brent) due to rising inventories in the US and a drop in global demand, major companies were feeling the bite of the (yes, we have to say it) ongoing glut.

Companies such as ExxonMobil, Chevron, Italy’s Eni, Royal Dutch Shell, British Petroleum (BP) and Conoco Phillips – which have all been laying off thousands of personnel in the past 18 months due to the oil price drop – are now reporting dismal if not extremely steep declines in second quarter earnings.

ExxonMobil’s second quarter earnings came in at 41 cents a share, 23 cents below forecasts amid its worst earnings in nearly 18 years.

Chevron reported a $1.5 billion loss for the second quarter due to one-time operating costs – its worst such decline in 15 years.

Royal Dutch Shell’s second quarter earnings were its worst since 2005. BP, meanwhile, said its earnings were down by 45 per cent.

This has led to a significant drop in energy sector investments, something that has even impacted US GDP growth in the first two quarters of the year.

As the third quarter begins, energy markets are experiencing renewed volatility of the type witnessed in January 2016 when oil prices briefly plummeted to the mid-20 dollars a barrel mark.

There is also renewed fears that with Iran having increased its market share by up to one million barrels a day, there has been weakened demand in the face of oversupply this summer.

This has led to fears that storage facilities are at near saturation points and that excess oil will have to be ‘parked’ in large supertankers, thereby further increasing operating costs yet again.

A year ago, Goldman Sachs warned in a report that “Distillate storage utilization in the US.and Europe is nearing historically high levels, following near record refinery utilization, only modest demand growth (especially relative to gasoline), and increased imports from the East on refinery expansion and Chinese exports”.

This is creating a new ‘energy status quo’ where industries have to contend with low oil prices which are adding pressure to move away from shale drilling and lay off thousands of employees.

Even before the latest oil price tumble, companies investing in shale oil production started to fear a dwindling profit margin and began to scale back investment in this energy sector.

Shale investor ConocoPhilips, for example, had by the beginning of the year slashed its budget by more than 20 per cent.

Chevron’s Chief Executive Officer John Watson told Reuters last week that the company is undergoing a period of “ongoing adjustment to a lower oil price world”.

This ‘adjustment’ translates to growing challenges for big oil to continue pouring billions into investments in the face of lower earnings and ongoing weak demand.

The hope for big oil is that predictions by Saudi Arabian and Emirati oil ministers will pan out. In the past two months, Saudi Arabia’s energy minister Khalid Al Falih has been quoted by local media as saying that he believed markets were heading toward “balance” where demand rises to meet supply.

Read more: Are the Saudis toying with oil markets?

The BRICS Post with inputs from Agencies