Crude oil refining margins have been trying to warn the world about weak US demand for months now. This week’s oil major results may finally spread the realisation that not all is well in industrial demand for energy into the wider public consciousness.
Stephen Schork of the Schork Report sets out the case very succinctly on Friday:
Demand, not only for gasoline, but for other major products markets as well, is going the wrong way, i.e. from the top left to the bottom right on the charts. Thus, Big Oil is straining under the weight of poor margins. So far this earnings season we have the following lowlights from the second quarter,
• Repsol… profit down 62 percent
• Shell… profit down 67 percent
• BP… profit down 53 percent
• ExxonMobil… profit down 66 percent
• ConocoPhillips… profit down 76 percent
• Petro-Canada… profit down 95 percent
The case, of course, is even worse for independent US refiners like Valero, who not only
reported a Q2 net loss of $245m but warned this week it would be unlikely to deliver profits in the following quarter too.
If all this comes as a
surprise, we can understand why. Back in the
fourth quarter of 2008 and also the first quarter of 2009, a clear case of irrational exuberance appeared to grip the sector. And even now, as Schork sums up very well, there still appears to be a tendency of denial.As he explains (our emphasis):
It is now hard to reconcile these earnings reports, demand was lousy in the second quarter (and it not any better today). Yet, this market was being fed a fantastic lie back then… the less bad is good mantra. Thus, whereas spot crude oil on the NYMEX finished the first quarter just below $50 a barrel (49.66) it finished the second quarter just below $70 (69.89). Crude oil rallied 40 percent as profits at the world’s largest oil companies were tumbling.
Why? Because this market wanted to ignore the obvious and lull itself to sleep with silly pseudo-intellectual catchphrases… green shoots, crocuses, mustard seeds and this season’s rookie of the year… the second derivative.
Thus, while we were led to believe that demand for oil was rising in the second quarter, hence the justification for that 40 percent surge on the NYMEX, we now have the balance sheets from Exxon, Shell et al. that prove it was a lie.
Look at the screenshot of headlines we pasted on the top of today’s report. Profits for Big Oil are down as demand is at generational lows. However, look at the very first headline, the NYMEX was higher yesterday because “… corporate earnings boost confidence…” Huh? According to this one article, demand for oil and therefore profits for oil companies are down, but the NYMEX rallied yesterday because Motorola (mobile phone maker) had a smaller than projected loss and Calphalon (cookware) and Paper Mate (writing instruments) had better than expected profits.
He’s certainly got a point. Just look at the oxymoron that is the following screenshot:
This entry was posted by Izabella Kaminska on Friday, July 31st, 2009 at 9:19 and is filed under Capital markets, Commodities. Tagged with bp, distillates, Exxon Mobil, gasolline, refining, Repsol, shell.
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