About 14 months back, no one would have ever thought that the oil price would plummet as it did during the same period. In fact, even the oil firms, Chevron Corporation (NYSE:N:CVX) and Exxon Mobil Corporation (NYSE:N:XOM), would not have thought that the worldwide oil will drop down to below $50 per barrel a year ago. One of the reasons for oil to cross even the $100-mark or $125-mark was the absence of a strong catalyst to invest in any financial instruments that will provide decent returns. That was because of the impact of the financial turmoil apart from the lower interest rates. Now, that the stock market has been providing steady returns, oil prices returning to even $50 would become a big factor to boost the sentiments on oil stocks. Also, there are bleak chances of oil staging a strong recovery in the immediate term throwing the plans of oil companies to the winds.
Drop In Production Fails To Have Impact
There is nothing about Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM)’s business performances to blame for their troubles. As leaders, they have been taking every step that is possible to face the challenges ahead of them. The sharp drop in worldwide oil price would result in steep fall in price realization per barrel. The global oil cartel tried to impress upon the Oil Producing Export Countries (OPEC) to slash the production of oil so as to enable oil price to stabilize. However, OPEC was not convinced and refused to cut production as they were not happy with the development of alternate fuels like Shale gas.
That left both Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) with little alternative but to slash oil production. For instance, Chevron’s worldwide net oil and gas production slipped to 2,539 MBOED in the third quarter from 2,596 MBOED in the second quarter of the current year and from 2,568 MBOED in the last year. Not only these two firms, but others have also followed suit. The oil firms’ move reflected in the drop in oil production in the United States in the recent months. However, the move failed to have an impact on the global oil price since crude continued to remain oversupplied. It was a common feature that tankers loaded with crude have lined up at ports throughout the world waiting to unload.
Oversupply Can Lead To A Worse Position
It is quite obvious that the current situation gives enough alarm bells for the oil companies. Both Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are a worried about the possibilities of an oversupply of oil leading to a worse situation in the coming weeks. Energy brokerage Powerhouse CEO, Al Levine, said that it was not an easy task to ignore the amount of oil around. While the Brent oil is around $44 or $45 level per barrel, oil prices were hovering around $42 in the NYMEX. The global supply of oil could rise further in the coming months once Iran enters the markets with its production of several hundred thousands of barrels a day crude oil. The country has already indicated its intention that it would boost its exports once the sanctions are removed.
These series of unfavorable developments to oil firms effectively seal any rally in the current year. If Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) manage to post profits, it was because of their size of operations and the focus on both downstream, as well as, upstream. However, they cannot escape from the challenges ahead of them though they have the wherewithal to manage them effectively. There are indications that developed economies have record-high commercial stockpiles. That would be like a cushion to any shock in supply. Aside from that, some countries have tactical inventories to face any eventualities. These factors meant that there are no chances of demand picking up in the near-term.
Jet-Fuel and Gasoline Consumption To Gain
Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) could derive some solace from the comments made by the International Energy Agency. The agency sees international demand growth to reach a five-year high in the current year. That was primarily because of the gains witnessed in gasoline and jet-fuel consumption. The drop in oil price has made people take the flight route resulting in improved demand from the airline firms. However, that was not enough to offset the overall weakness witnessed in other space.
Aside from these, the weather also plays its part in dictating the oil and gas prices. The mild start to winter in the Europe, as well as, the United States has resulted in a subdued demand for heating-oil, which is an important factor to drive the oil demand at this time around. It was quite possible that Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) would have expected these unfavorable conditions to impact the demand. However, they might be worried over the prolonged moderate temperatures. That was because it would only boost the stockpiles of heating oil and other distillates thus impacting on refinery margins besides a drop in crude oil demand.
Analysts Comments
Goldman Sachs Group Inc has already issued warnings that distillates storage tanks reaching its capacity would only hurt the oil price. That further drives down the global oil price to $20 per barrel. That would be the biggest worry for Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) to encounter in the days to come. Another brokerage, JPMorgan Chase & Co. said that oil markets would remain weak in the near term as warm weather adds to the woes. The financial firm reduced its oil price futures target to $44 a barrel.
If the global oil price needs to cross the $50 per barrel-mark, then the weather and OPEC should act as catalysts. Currently, indications are that America will witness warmer than normal temperatures. OPEC is unlikely to change its stance. Therefore, the prolonged spell of oil price remaining weak is seen.
Conclusion
It is a known fact that both Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are well-managed companies. Therefore, they could manage the situation arising out of the long spell of weak oil price. While it is tough to suggest any price target for the two stocks, investors can only take short-term calls based on the global oil price movement. Also, dividend investors’ can expect the stock to provide better yields.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.