Cut to the Quick
Oil prices are still struggling and big oil is being forced to cut to the quick. Today’s Wall Street Journal is reporting that even ‘big oil” is going to have a hard time surviving the pull back in energy prices. The Journal writes that,
"the world’s biggest oil companies are struggling to generate enough cash to cover their spending and dividends, despite efforts to slash billions of dollars from their budgets in the face of tumbling oil prices. Spending on new projects, share buybacks and dividends at four of the biggest oil companies known as the super-majors - Royal Dutch Shell PLC (L:RDSa), BP PLC (L:BP), Exxon Mobil Corp (N:XOM) and Chevron Corp. (N:CVX) - outstripped cash flow by more than a combined $20.0 billion in the first half of 2015, according to a Wall Street Journal analysis.”
The outcome will mean that we will see even more capital spending cuts and more oil projects put on hold, creating a tight oil market in the future. As the Journal says,
“after a decade when high oil prices supported megaprojects and steadily escalating payouts to shareholders, the supermajors have slashed spending by more than $30 billion in recent months, laying off workers and delaying projects. More cuts are expected.”
We are seeing ‘little oil’ struggle as U.S. oil rig counts fell for the eighth week in a row. Baker Hughes (N:BHI) reported that the U.S. oil rig count fell by 1 to 594. The total combined count of oil and gas rigs was unchanged at 787, the lowest since April 2002.
This drop in rigs is slowing U.S. production and giving rise to U.S. imports. The Wall Street Journal focused on this and reported, “U.S. imports of foreign oil are rising again after a long decline, as the oil bust forces domestic producers to scale back. Less than a year after the Organization of the Petroleum Exporting Countries opted to continue production despite plummeting prices, member countries including Saudi Arabia and Iraq are clawing back market share they ceded to oil companies pumping in Texas and North Dakota.
U.S. crude imports declined 20% between 2010 and 2014 amid the domestic energy boom, but have recently started to rise again. Total crude-oil imports rose for three straight months between April and July, according to the most recently available data from the Energy Information Administration. Imports of light crude grew more rapidly, from 5.6% of total imports in April to 11% in July. On the Gulf Coast, vessels carrying nearly a week's worth of imports waited offshore Friday to unload, according to shipping tracker ClipperData. The slowdown in the nation's shale-oil output has pushed up the price of high-quality U.S. oil relative to global prices, giving U.S. refiners a reason to buy from countries such as Nigeria. Until very recently, the boom in U.S. shale-oil production forced countries that export oil to the U.S. to hustle for new customers. Decreased reliance on foreign crude in the past few years has allowed the U.S. to be more flexible in its foreign policy and given the U.S. more global heft, politicians and analysts have said.
It is just not energy companies but also OPEC that has some changing to do. As I reported last week, the International Monetary Fund is warning OPEC to cut spending or raise taxes or face running out of cash in five years or less. Low oil prices will wipe out an estimated $360 billion from the region this year alone.
Yet oil may get support from the Fed and China. And the Fed can’t raise rates and China already has.