In Depth

Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

Oil price drop hits profits at Exxon and Shell

1 May

Profits at Royal Dutch Shell and Exxon have been hit by lower oil prices, but both companies' results still comfortably beat forecasts.

Although underlying first-quarter profits at Shell fell by 56 per cent from a year earlier to $3.2bn (£2.1bn), analysts had expected profits of around $2.5bn. Meanwhile, Exxon Mobil reported a first-quarter profit of $4.9bn, the BBC reports, down from $9.1bn last year.

Both firms' refining arms performed well, but profits at Shell's upstream business, which includes oil exploration and production, dived by 88 per cent to $657m.

In the wake of the results, Shell said it is back on the acquisition trail, ThisIsMoney reports. Finance director Simon Henry said that, while the oil giant lacked the financial firepower for another transformation deal, "we will look at anything we might be interested in".

Shares in Shell rose by 1 per cent, or 25.5p to 2,094p, in the wake of the news.

Earlier this month, Shell announced it had agreed to buy oil and gas exploration firm BG Group in a £47bn deal. If approved, the deal would be one of the biggest of 2015 and create a company valued at more than £200bn.

A sharp fall in the price of oil has hit the industry hard. After peaking at about $115 a barrel in the summer of 2014, the price more than halved, although it has recovered slightly since the beginning of the year. Earlier this week, BP said underlying profit for the quarter fell 19 per cent to $2.58bn compared with a year earlier.

Oil price slump hits profits at Shell and BP

30 April

Royal Dutch Shell has reported a drop in profits of more than 50 per cent due to the falling oil price, mirroring the poor results reported earlier in the week by BP.

Shell's underlying profits for the first quarter of 2015 fell from $7.33bn (£4.8bn) this time last year to $3.25bn, The Guardian reports. But the report was not as bad as some analysts had predicted.

Earlier in the week, BP also reported a fall in underlying profits. The British energy giant announced profits were down by 19 per cent to $2.58bn over the past three months, compared with $3.2bn for the equivalent period in 2014.

The production and exploration side of Shell's operation has been steadily losing money throughout the first quarter, but profits from its non-production businesses, including its refining operations, rose from $1.58bn to $2.65bn helping the company to exceed analysts' forecasts.

Announcing the figures, chief executive Ben van Beurden said: "Our results reflect the strength of our integrated business activities, against a backdrop of lower oil prices.

"In what is clearly a difficult industry environment, we continue to take steps to further improve competitive performance by redoubling our efforts to drive a sharper focus on the bottom line in Shell."

The primary cause of the fall in profits for both energy companies was the low oil price, which averaged $54 a barrel throughout the first three months of this year. That compares with an average of $108 through the same period in 2014, the Financial Times reports.

Oversupply and a growing oil glut hit crude prices hard at the end of last year, with the oil price falling from a peak of $115 per barrel in June 2014 to just $45 in January.

In response, BP has undertaken a raft of cost-cutting exercises, pledging in February to reduce money spent on new projects by 20 per cent.

Bob Dudley, BP's chief executive, said: "We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices. Our results today reflect both this weaker environment and the actions we are taking in response."

He added: "We are continuing to progress our planned divestment programme, we are resetting our level of capital spending, and we are addressing costs through focusing on simplification and efficiency throughout BP."

Royal Dutch Shell recently announced plans for a £47bn merger with British gas company BG Group. If the merger is approved it will be "one of the biggest of 2015 and create a company valued at more than £200bn", the BBC reports.        

Oil price reaches four-month high 

27 April

The oil price has recorded a four-month high, breaking through the $65 per barrel mark for the first time this year, as supply from US oil rigs drops and concern mounts that conflict in the Middle East could lead to disruption to the supply of oil.

Brent crude, the international oil price benchmark, reached $65 per barrel soon after 2pm BST, having gained around $9 since last month. It dropped through the $65 mark shortly before Christmas last year during its precipitous drop from nearly $110 a barrel last summer to $52 in January.

Traders think that the period of low oil prices may now be coming to an end, Bloomberg reports.

"The falling rig count and the reduction we're starting to see in output shows that the bottom has in fact been installed," John Kilduff, a partner at energy hedge fund Again Capital LLC told Bloomberg. “A lot of people are throwing in the towel."

The oil price rally has also been driven by concern that fighting in Yemen will disrupt the one of the world's busiest channels for shipping oil.

"There's concern that the violence in Yemen could spill across into Saudi Arabia," Andy Lipow, president of Lipow Oil Associates LLC in Houston, said last week. "A decline in supply and the upward projection in demand would get the oil market in balance faster than expected."

The news comes as BP, Exxon Mobil and Shell are preparing to report significant falls in their first quarter earnings, the BBC says.

Even so, Michael Hewson, an analyst at CMC Markets, said: "Overall we are in an upwards trend and we do appear to have found a short-term base. There's a good chance we could see $70 a barrel [for Brent] over the course of the next month or so."

Oil's current trajectory may change the minds of those who had predicted that prices would fall even further than January's low. In February, strategists at Citi suggested that the oil price could reach $20 a barrel due to the global glut that has come about through combination of oversupply and lower than usual demand.

Now however, there are signs that the problem of oversupply may be beginning to ease, Business Insider says.

Oil price: traders and CEOs clash over recovery prospects

23 April

Disagreement about the future direction of the oil price is emerging as energy traders prepare for a quick recovery while oil company chief executives hunker down for an extended period of low prices and cost-cutting.

The biggest names in the industry gathered for the IHS CERAWeek energy convention this week amid "the worst price rout in many years", Bloomberg reports, and many of the delegates offered a gloomy picture of oil's current prospects.

But the financial community is rather less pessimistic, buying energy equities "in a bet that the oil price cycle may turn more quickly than the industry expects", Reuters says.

One of the main topics for discussion at CERAWeek has been if and when the oil price might begin to recover. Since June last year the oil price has collapsed from a peak of $115 per barrel to just $45 in January.

ExxonMobil CEO Rex Tillson said in his address that companies need to prepare for an extended period of low oil prices.

"I think people need to settle in for us to be in a different price environment for at least a couple of years and then we'll see how things respond," he said.

BP group CEO Bob Dudley expressed a similar view, telling CNBC that the oil price will be "lower for longer. Don't know how long… several years absolutely a possibility… The rigs have come down from 1,600 operating rigs onshore in the US to 750 and yet oil production keeps going up."

Dudley added: "If there is a deal signed in Iran that will change the balance supply in the world. Chinese growth, certainly there, is coming down. So I do think the industry needs to prepare for lower for longer."

But according to David Asmus, a Houston-based partner at global law firm Morgan Lewis "there is clearly a gap in view between the strategics and the financial community."

This "perception gap" is not unusual, Reuters says. Oil executives often take a more conservative view of the state of the industry, opting for a more cautious approach than traders who are paid to take greater risks.

"Equity markets are already looking for the upside," said Scott Key, chief executive of IHS. "They see a one-year horizon. The industry has always been more patient."

Many oil executives said at CERAWeek that they are now operating under the assumption that the oil price could remain depressed for several years.

"We're planning for $60 oil," said Stephen Chazen, CEO of Occidental Petroleum. "I think there's still a lot of 'whistling in the graveyard' mentality… One could hope for $75 oil but you've got to plan for lower."

The long-term consequences of low oil prices could be profound, CEOs at the conference agreed. Some of the industry's "long-term thinkers" expressed concerns that many firms could "lose a generation of engineering talent if companies cut too deeply into the bone of their organisation", Bloomberg reports.

Oil price falls as US dollar and Saudi output rise

22 April

The oil price fell towards $62 per barrel today after US dollar growth swept aside early gains for the commodity.

Brent crude, the global benchmark, fell by just over one per cent to $62.81 by at 2.30p BST, while West Texas Intermediate was down by 0.52 per cent to $55.54.

The drop in value followed gains in morning trading after China, the world's second-largest consumer of oil announced a fresh economic stimulus package over the weekend, Reuters reports.

But China's surprise move was counteracted by the US dollar's strong performance coupled with a pledge from Saudi Arabia's oil minister, Ali al-Naimi, that throughout April production in the world's biggest crude exporter would remain around 10 million barrels per day (bpd).

Over the past week, the oil price has gathered momentum due to hopes that lower production across US and the Middle East might gradually eat into the global oil glut that has hit crude prices hard in recent months, causing them to fall from a peak of $115 per barrel in June to $45 in January.

But on Monday, Naimi told Reuters that Saudi Arabia does not intend to decrease its current levels of output.

"I have said many times we will always be happy to supply to our customers with what they want. Now they want 10 million," he said.

Last week the oil price "shot up" by more than seven per cent, the Wall Street Journal reports, buoyed by the expectation that US oil production could soon begin to slow.

"In the second half of the year and going forward, the market should start to rebalance itself as US production slows and demand picks up," Societe Generale said in a note to clients.

But Morgan Stanley has warned that it could be a mistake to overestimate the importance of US output in light of Saudi Arabia and Opec's refusal to cut production.

"We worry about the market's fixation on the US... Opec production may be more important as production increased one million barrels per day month-on-month in March. Saudi Arabia alone added the equivalent of half of Bakken (the largest US shale oilfield) production in a matter of months – far beyond any US slowdown," the bank said in a note.

Oil price slips again as Opec output rises

April 16

The oil price fell on Friday morning after reports suggested that Opec's rising crude oil output will outweigh slowing production in the US.

Oil has had a positive week overall with Brent crude, the global benchmark, rising towards its 2015 high point yesterday. In morning trading today, however, Brent slipped again, falling 0.69 per cent to $63.54 by midday BST. West Texas Intermediate was down by 0.62 per cent to $56.09.

Over the course of April, the oil price has rallied by more than 16 per cent, Reuters reports, as traders anticipate disruption to the supply of oil from the Middle East due to ongoing unrest in Syria and Iraq and fighting in Yemen.

Lower output from the Middle East had been expected to dent the global oil glut that has hit crude prices hard in recent months, causing them to fall from a peak of $115 per barrel in June to $45 in January.

But yesterday, Opec said in its monthly report that rather than diminishing its output in March, production had jumped by 810,000 barrels per day (bpd) to 30.79 million bpd. The figures were supported by data released on Wednesday by the International Energy Agency that reported a surge in Opec production to 31 million bpd.

"There is the prospect in the second quarter of an enormous 2.4 to 2.7 million bpd stockbuild if Opec production continues at 31 million bpd," said David Hufton of brokers PVM.

The oil price had been supported earlier in the week by data showing that US production may be slowing, raising hopes that the country's stocks may gradually begin to decrease.

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