A spot of turmoil in financial markets brought world oil prices to a two-week low this week, and some analysts saw potential for prices to fall further still, just days after at least two major fossils reported missing their quarterly profit targets.
The numbers were a splash of cold water for an industry that had been growing at a gradual recovery in world prices, with some reports suggesting oil could reach US$80 per barrel in the foreseeable future. Earlier this week, as the Dow Jones Industrial Average plummeted 1,175 points, its biggest loss in 6½ years, benchmark West Texas Intermediate (WTI) crude oil was down 2% to $64.15 per barrel, while Brent crude fell 1.4% to $67.62.
While the price dip had little to do with the oil market itself, it pointed to fossils’ dependence on wider economic trends and investor expectations over which they have little or no control.
“This was crowd psychology at its best,” Adviser Investments CEO Daniel Wiener told the Washington Post. “Investors had the weekend to worry about what happened Friday, and they sold on Monday. This is normal, everyday stock market volatility. And it’s healthy.”
“When something becomes too good, we know it’s about to end in tears,” agreed Ole Hansen, head of commodity strategy at Saxon Bank. “And the market has almost become too perfect in the last few months.” Elements of that fatal perfection apparently included a strong U.S. dollar, rising wages, higher employment, and increased oil and gas production, all leading investors to sell of a bunch of stock in anticipation of higher interest rates for borrowed investment capital.
The result, according to the Seeking Alpha investment blog: ExxonMobil shares fell 5.7% on Monday, Chevron Corporation by 5.3%, BP by 4.4%, Kinder Morgan by 3.5%, and Energy Transfer Partners by 2%, among many other losers.
“The stock market and interest rates can really affect oil a lot,” explained Mark Waggoner, president of Excel Futures. “It’s spilling over into the energy markets and causing these ripple effects.” And oil market analysts at Texarkana, Texas-based TAC Energy said the price decline could continue.
“The potential is present for a big move lower should fear return to the stock market and spark liquidations across the board,” they stated Friday, before Monday’s market losses.
PVM Oil Associates analysts Tames Virga and Stephen Greenock saw a global sell-off of risky assets “gathering pace and sending the energy complex lower amid a sea of red,” even as U.S. fossils continued to put more drilling rigs into operation. “There is only limited fundamental justification for the high price level,” added Frankfurt-based financial services company Commerzbank A.G. “It is therefore conceivable that the correction in oil prices will continue.”
Meanwhile, Exxon and Chevron both reported lower-than-expected profits last week, with Exxon losing 3.6% in share value as investors absorbed the news. The company’s quarterly report showed “falling production and weakness in its chemical and refining operations,” Reuters reports. “There were pretty weak cash flow numbers,” said London-based analyst Jason Gamely of Jeffries LLC. “It was a pretty big miss.” By Monday, Bloomberg was reporting an overall 10.3% drop in Exxon stock, “the driller’s steepest two-day plunge since August 2015.”
Even so, the colossal fossil’s results would have been considerably worse if not for the massive gift it received through Donald Trump’s recent tax reform package, reports the Institute for Energy Economics and Financial Analysis. “Without the benefit of recent tax reform, the company’s quarterly earnings would have been nearly flat, and the company would have lost money in its U.S. upstream operations,” write Director of Finance Tom Manzullo and Kathy Hippie, founding partner at No sphere Marketing.
“Exxon is depending on rising global prices to earn a profit while having increasing difficulty in translating higher oil prices into higher profits,” they add. “For long-term investors, this was Exxon’s twelfth consecutive quarterly loss in its U.S. drilling business.”
Exxon’s Canadian subsidiary, Imperial Oil, also missed its quarterly profit target and saw its share price fall about 4%, Reuters reports.