Shares in Royal Dutch Shell took a bit of a walloping on Wednesday as reports circled the city the company was guiding analysts lower on fourth-quarter numbers:
The reason for the move was seemingly a worse than expected performance in Shell’s downstream and gas operations in the period.
According to one dealer cited by Reuters, the amendment would be sizeable too:
“Consensus for Shell’s Q4 appears to be falling sharply. Lower gas realisations and losses downstream suggest earnings of around $2.6 billion in the fourth quarter versus expectations previously closer to $3.3 billion,” one dealer said.
“They (Shell) did suggest that refining margins have been very weak and also that the seasonal uplift of gas consumption we usually expect in the fourth quarter may not be so big this time,” one analysts who spoke to Shell said.
All of which shouldn’t come as a surprise if you’ve been following the oil-products and gas markets, both of which suffered uniquely grim demand over the course of 2009.
A Shell-specific situation it is not.
Late on Monday US oil major Chevron warned it too expected fourth quarter results to be “sharply lower” than previous quarters — and largely for the same reasons. As the group noted:
Refining indicator margins worldwide for the full fourth quarter declined to the lowest levels of the year. Marketing indicator margins in the United States were also lower in the fourth quarter. Comparing October and November with the third quarter, the Asia-Pacific / Middle East / Africa marketing margin saw a modest improvement. During the first two months of the fourth quarter, daily U.S. refinery crude-input volumes were down 50,000 barrels per day, or about six percent, resulting from planned maintenance at the El Segundo refinery in California. Outside the United States, refinery crude-input volumes were down 18,000 barrels per day largely due to planned maintenance at the Burnaby refinery in Canada.
Both U.S. and international downstream results in the full fourth quarter are expected to be substantially lower, in large part due to depressed margins. Additionally, downstream earnings are projected to include unfavorable timing effects due in part to the increase in crude oil and refined product prices between the beginning and end of the quarter.
Deutsche Bank analyst Paul Sankey estimated the firm’s refining-related losses could have stacked up to as much as $600,000 a day in the fourth quarter, Bloomberg reported.
And it’s unlikely to stop with those two firms. Writing on Wednesday, Stephen Schork of the Schork Report suggested disappointing Q4 figures would probably become an overriding industry theme this quarter. As he noted:
Get used to it. That is going to be the theme through the fourth quarter earnings season. What’s more, at the rate in which this year opened, losses in the downstream will temper upstream earnings through the first quarter earnings season as well.
As such, Chevron et al. have taken measures to address this issue. In Monday’s statement Chevron reported that during the first two months of the fourth quarter, U.S. refinery crude input volumes were down 50 Mbbl/d or around 6%. That was 50 Mbbl/d of crude oil demand that went missing in the first two months of the fourth quarter from just one company. Of course, Chevron was not alone.
Per the latest monthly numbers from the DOE, U.S. refinery crude oil inputs in October 2009 were 499 Mbbl/d or 3.4% below October 2008. Inputs per the DOE’s weekly reports through November and December averaged 637 Mbbl/d or 4.4% below a year earlier.
Meanwhile, he added it’s ironic the weak performance had not stopped investors from piling into the paper crude and products markets:
The apparent lack of demand at the end of last year to boil oil by the only guys who actually demand wet barrels of crude oil did not lessen Wall Street’s appetite to own the paper version. According to last Wednesday’s DOE report crude oil inventories as of January 01st at the NYMEX delivery hub in Cushing (PADD II) hit an all-time high of 35.7 MMbbls. Yet, according to the CFTC, as of January 05th noncommercial traders owned 6 times as many barrels in the NYMEX futures (net 108,835 contracts) than actual oil currently sitting in Cushing.
Seemingly the chasm between reality and investor fantasy is unlikely to abate any time soon. Olivier Jakob of Petromatrix noted on Tuesday that funds had now accumulated record length in exchange traded oil futures.
More disconcertingly still, large speculators had also piled into gasoline and heating oil futures in record proportions too.
On gasoline specifically Jakob noted (our emphasis):
It will take many rats to tighten the US Gasoline supply and demand picture. Yesterday a wire-eating rat forced Citgo to shut down a FCC at its Corpus Christi refinery and while there has been a series of FCC glitches in recent days (some of them linked to freezing temperatures rather than rats) the gigantic Gasoline build reported by the API should alleviate any fears of a tightening in the days-of-forward cover.
Large Speculators are holding record net long positions in Gasoline and we are not in step with that logic when Gasoline stocks are at the highest levels for the same week since 1994, when Ethanol takes a growing market share from petroleum gasoline (one would actually need to add about 10 myn bbls of Ethanol stocks when comparing with 1994), when un-employment is at extremely high level and consumers are switching to higher mileage automobiles.
Tuesday’s API stock statistics, meanwhile, showed a build in both distillate and gasoline inventories last week despite the extremely cold weather in the United States.
Related links:
Independent refiner downgrades imminent? - FT Alphaville
Petroplus, still praying for a distillate recovery – FT Alphaville
Distillate hangover – FT Alphaville
Independent refiner downgrades imminent? – FT Alphaville