Q1 Update: Economy Keeps Taking Toll on Oil and Gas Markets

The business landscape continues to crystallize for the oil industry, although not in the way that many of us in the industry hoped it would.

Of course, all things are dynamic and things could change, and for the better. But right now, we’re getting and storing oil here in the U.S. – that’s not the problem – we’re just still not seeing much demand from customers.

A barrel of oil remains at about $50 apiece, even as commercial US crude inventories rose to the highest level since 1990, according to the Energy Information Administration.

The EIA says that U.S. crude oil inventories jumped to 5.6 million barrels from 366 million barrels during the week ending April 10, 2009. Gasoline inventories did fall slightly – by 900,000 barrels over the same time period, but that’s fairly normal for this time of year.

But even though OPEC has cut supply, U.S. tanks and containers remains awash in oil. "The main US market is receiving more crude oil, not less, than last year,” Olivier Jakob at Petromatrix, Zug, Switzerland, told The Oil and Gas Journal last week. "On the 4-week average, crude imports into the US Gulf Coast are 500,000 b/d higher than last year despite the fact that OPEC production is supposed to have been 3.2 million b/d lower than a year ago in the first quarter.”

So we have the oil but can’t sell it – and that’s a key issue hurting the energy sector right now. The oil and gas industry is like a big eighteen-wheeler stuck in the ditch – engines roaring and tires spinning furiously, but with no traction and no forward momentum.

How tough is it out there right now? According to the American Petroleum Institute, U.S. oil and gas drilling has fallen to its lowest levels in six years.

-- Oil product deliveries slowed by 3.4%  - the lowest number since 1998, says the API.

-- The EIA reports that reduced demand from a weaker economy will offset any demand increases resulting from lower product prices this summer driving season, even though consumer demand for gasoline will finally rise again this June – by about 1%. That should pump gas prices up to about $2.25 a gallon – a bit higher than they are this spring.

But it’s the long-term, downward curve that concerns me. Sure, the oil industry is a volatile one, with highs and lows that would match any global business sector. But we continue to be stuck in that ditch, and have been for some time now. Says the API, in agreement with my point, "The substantial, 4-year decline means that the US share of world oil consumption fell from nearly 25% in the first quarter of 2005 to under 23% in early 2009, based on International Energy Agency estimates," API said.

Any regular readers of this weekly column know that I’ve been keeping track of new wells. That’s been a sluggish environment, too. The AAPI is out with some new numbers on wells and dry holes, reporting that about 11,071 oil and gas wells were completed in the US in the first quarter of 2009—22% less than in 2008's first quarter and 35% lower than the in the fourth quarter of 2008. The API also says that the estimated number of new exploratory wells dropped 11% from 2008's first quarter, while the estimated number of deep wells—those 15,000 ft or deeper—and shallow gas wells slipped 13% and 36%, respectively.

Consequently, we’re not going to be seeing great numbers once the oil industry Q1 revenue numbers come out. Oil producers, oil services companies, and natural gas outfits should see profit numbers that will be among the lowest in recent years – maybe the worst in a decade, based on the picture I painted above.

Let’s use ConocoPhillips as an example. The company has already warned investors that lower oil prices have set the stage for a lousy quarter. In an investing brief, Conoco reminded Wall Street that oil was down $54.97 a barrel versus the first quarter a year ago. That sets a pretty low bar for earnings, and Wall Street has already begun the process of chopping expectations down. Analysts surveyed by the financial information company Thomson Reuters expect that ConocoPhillips will post first-quarter earnings of 44 cents a share, 83 percent below results of a year ago. In the very same survey, The Chevron's per-share profit is expected to fall 65 percent, and Exxon's to drop 53 percent.

From Thompson Reuters; “Much depends on the price of oil, but for now analysts' full-year earnings estimates versus 2008 are also pretty dire: Conoco down 70 percent, Chevron down 58 percent, Exxon down 49 percent.”

Hey, I wish I could tell you different, but we’re going to start seeing some significant spending cutbacks and maybe even the first big round of layoffs in the oil industry.

It’s a negative picture, but an honest one. Let’s hope the landscape for Q2 is more favorable.

Posted 04-21-2009 2:04 AM by Bret Boteler
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