Where Exxon Goes, So Goes the Oil Market?

I don’t write about oil stocks all that much, but it’s earnings season, and some of the big boys are clocking in with profit numbers.

The impact those numbers have could reverberate onto the profit pictures of oil drilling and oil refining companies, so they’re well worth looking at.

First up, Exxon Mobil Corp (XOM.N) and Chevron Corp (CVX.N).

Both oil behemoths posted better-than-anticipated quarterly earnings, issued last Friday, as refining profits helped offset a steep decline in crude oil prices. Exxon saw its earnings decline by about 30%, but that was more than offset by full-year profits of $45 billion, the company said.

Any Wall Street trader knows that cash is king in a recession, and Exxon is loaded up with the green stuff. Company statements reveal that, at the end of 2008, Exxon had over $31 billion in cash, giving it the financial cushion needed to weather the economic storm and wait for oil prices to rise again, which we all know they will.

Another sign of long-term confidence is Exxon announcing that it will buy back $7 billion in company stock, a move companies usually make when they feel confident the price of the stock will rise significantly. It also helps increase dividend payments, a move that will please shareholders, a lot of whom have spent the last six months grumbling about the company’s stock price.

That doesn’t mean Exxon is out of the woods yet. Profits fell in oil and gas production, down $2.57 billion to $5.63 billion, as oil prices plummeted to under $60 per barrel in the fourth quarter, compared to $90 per barrel for the same period in 2007. Exxon’s oil production also fell, to 45,000 barrels per day to 2.47 million barrels per day, mostly due to OPEC quotas and lower demand. Exxon said its 2008 exploration budget was $26.1 billion, up 25 percent from 2007.

The Exxon picture is a useful one for the rest of the oil industry. Normally, as oil is a lynchpin to the S&P 500 index, any bad news coming from the oil markets means bad news for the entire stock market. And that would certainly trigger a sell-off, if not stampede, among oil investors as the year progresses.

But I’m not so sure.

Historically, oil prices climb in the first quarter of a new year. With slightly above-average temperatures in the northern half of the U.S. in December and early January, this trend looked like it was on life support. But temperatures from Boise to Boston fell significantly in mid-January, helping contain price growth in the last half of the month.

But that’s been the trend for a while. Since 2002, crude oil futures have climbed on average 12% from the previous quarter. So you’d have to say oil price hikes are no surprise in January and February. As the song says, “baby, it’s cold outside”.

Higher oil prices also might come around in a while if OPEC has anything to say about it. Several weeks ago, the Organization of Petroleum Exporting Countries rolled out another round of production cuts, slashing 2.2 million barrels a day from its production lines.

At the Davos economic forum this past weekend, OPEC leaders say that future supply cuts are a given if the price of oil doesn’t bounce back.

My take? With a potential decline of about 100 million barrels over the previous quarter, which is roughly five times the average amount over the last five years, it’s no secret that the price of oil is going to climb - - and take millions of consumers out of the market along with it.

Hence, the squeeze is on, and its grip on oil companies won’t ease until oil climbs back to over $60 a barrel (it’s trading at $42 per barrel this morning), a benchmark that it is giving every indication of reaching in 2009.

Posted 02-02-2009 5:45 AM by Bret Boteler


Oil majors demonstrate long-term confidence in commodity prices : Bret L. Boteler wrote Oil majors demonstrate long-term confidence in commodity prices : Bret L. Boteler
on 02-03-2009 8:07 AM

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