Exxon Mobil (NYSE:XOM) saw its credit rating cut by S&P for the first time since the Great Depression and it is another sign that oil prices have bottomed. Exxon lost its AAA rating and saw it lowered to AA+. Even the biggest of “big oil” cannot escape the fallout from the global oil price crash.
S&P warned that Exxon has enormous spending commitments to pay its dividend payouts and is spending mammoth sums of money on expensive drilling projects which make their future look less certain. So if Exxon Mobil is becoming cash strapped, what chance do other producers have? As of now the global oil industry has cut a record $100 billion in spending last year and is in the midst of further cuts this year to survive what Schlumberger (NYSE:SLB) has called the industry’s worst-ever financial crisis. In North America alone, spending is expected to drop by half from last year according to Bloomberg. What this signals across the energy space is more production destruction and higher prices in the future and the recent rally in price won’t change.
This may filter into other commodity markets as well but perhaps not as quickly as oil. The Financial Times reports that Freeport-McMoran (NYSE:FCX) is cutting a quarter of the workforce in its oil and gas division after failing to secure a buyer for the business. Tuesday, the U.S. Copper miner and oil producer -- which has been trying to reduce its debt by $20bn -- posted a $4.2bn net loss for the first three months of the year, as commodity prices continued to fall.
What we are seeing are major producers that will have to continue to make cutbacks even as demand seems to be rising. Capital constraints will make it harder to ramp up production leading to a price spike in the future. Oil of course is looking ahead as we have seen this at the bottom of cycles before and that is why the Exxon Mobil downgrade was met with bullish action on oil.
Crude oil also saw more support as a drop in U.S. oil supply is suggesting that we are starting to work off the epic glut. Falling U.S. production and record U.S. gasoline demand and sharply improving distillate demand is sending signals that we will soon start to achieve market balance. The API reported U.S. crude inventories fell by 1.07 million barrels, while gasoline fell by 400,000 barrels and distillates by 1.02 million barrels. Cushing, OK. crude inventories did rise by 1.9 million barrels as flooding issues in Texas caused a drop in refinery utilization -1.2 %. We may have seen some gas demand weakness as well because of the massive rains.
The U.S. dollar was also in play lending support. Today oil may move on the more hawkish Federal Reserve Board statements and the dollar could rally, putting some downside pressure on oil. If they are more dovish, oil, more than likely, will soar.
For the crude oil market I keep using the word ‘historic” because what is happening in oil is just that. The Exxon downgrade is showing you that this contraction in energy is not just an everyday occurrence. Big Oil can’t take these prices any longer! Opec Can’t take these prices much longer! This is why we are seeing record cap x cuts in energy. Near record layoffs in the industry. Record drop in global rig counts. This is also why major oil producer Venezuela can’t keep the lights on and told public sector employees to work only Monday and Tuesday. One of the biggest energy reserves in the world and they can’t keep the lights on! Really! We are also seeing more geo-political supply risk from terror wars in Iraq, Nigeria and Syria.