Stock market investors are betting on central banks like the Federal Reserve sparking the global economy back to robust health through monetary policy. However, with interest rates already at zero for all practical purposes, the main weapon remaining in the Fed's arsenal is money printing through quantitative easing and other measures. And the effects of that medicine seems be less and less with every dose given.
But investors should not despair...right now, there is another force at work stimulating economic growth around the globe. What is it? Lower oil prices!
Since March alone, oil prices have declined by more than 30 percent, leaving consumers more spending power. The global benchmark for oil, Brent crude, has tumbled to its lowest level in over 18 months and is now trading below $90 a barrel. Quite a drop from its peak earlier this year at $128.40 per barrel. And that is thanks largely to Saudi Arabia boosting production earlier this year to a 30-year high in effort to help the global economy.
The drop in crude oil prices is a definite negative for investors in the oil patch though. Take a look at three of the large international oil companies – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and BP PLC ADR (NYSE: BP). The stock prices of both Exxon and Chevron have fallen by about 5 percent while BP has tumbled by a double-digit percentage so far in 2012. And their share price is unlikely to rebound strongly in the near future.
The reason? Lower oil and gas prices means lower earnings for these companies. According to FactSet, ExxonMobil is expected to earn $8.09 a share in 2012 versus $8.37 in 2011, Chevron is forecast to earn $12.98 per share in 2012 against $13.28 in 2011, and BP is predicted to earn $6.26 per share in 2012 compared to $6.89 in 2011.
So oil companies look to be losers in 2012 thanks to low oil prices. But there will be winners too. These are the big oil consuming industries such as airline and trucking companies. There is some evidence already that, for example, airlines are benefiting. The airline industry trade group IATA (International Air Transport Association) has hinted that the drop in jet fuel costs has already saved airlines nearly $20 billion (out of a forecast annual $207 billion price tag) in their costs. More evidence of lower oil prices being a boost to earnings in these sectors may become apparent when these firms start reporting results from the April-June quarter in the weeks ahead.
The interesting thing occurring right now in the oil market, which is both good but scary, is the lack of hedging by large oil users like airlines despite the 30 percent drop in oil prices. One would think major users would want to lock in these lower prices. But they are not at the moment.
The chief financial officer at Southwest Airlines (NYSE: LUV) said earlier this year that the company's hedge protection for the second quarter of 2012 was “minimal”. And according to the Financial Times, an executive vice-president at FedEx. Michael Glenn, stated last week that “lower fuel prices will help [his company]”.
But the scary part is that this lack of hedging is eerily reminiscent of 2008 when these companies did not hedge their fuel costs in anticipation of even lower oil prices thanks to growing economic weakness around the globe. They are apparently betting on further economic weakness coming out of Europe and China, the main engine of oil demand.
But the oil price weakness scenario could change rather quickly. Current oil prices are now below what could be called the comfort threshold for most OPEC countries including Saudi Arabia. These countries' budgets have ballooned in the past few years as they have spent on improving their citizens' daily lives because of the fear of widespread unrest as the Arab Spring moves from country to country in that part of the world. It is believed that Saudi Arabia, for example, now needs Brent crude oil to be at around $90 a barrel in order to pay for all the domestic programs they have initiated.
So investors and hedgers should not be surprised if it soon throttles back on oil production. Hopefully, airlines and other big oil consumers will have hedged their exposure to higher prices by then.
This article was originally written for the Motley Fool Blog Network. make sure read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Showing posts with label bp. Show all posts
Showing posts with label bp. Show all posts
Thursday, July 5, 2012
Monday, June 18, 2012
Alaskan Pipeline to Fuel US LNG Exports
The glory days of the Alaskan oil boom are long gone. Alaska's oil production, which at just above 2 million barrels a day in 1988, was less than a third of that at 563,000 barrels a day last year. Oil production from our 49th state is expected to continue declining. However, there is hope.....
Alaska may be able to relive past glories if the huge reserves of stranded natural gas on the state's North Slope can be brought to anxious buyers around the globe, particularly from Asia. Alaska's North Slope has proven reserves of 35 trillion cubic feet of gas, about one-eight of the US total, and unproven reserves estimated at 236 trillion cubic feet. The state already has significant gas production, the equivalent of about 1.5 million barrels of oil a day. But almost 90 percent of that natural gas is reinjected back into the fields because there is no existing way to deliver that gas to customers.
Initially, plans were being laid to ship some of that stranded gas to the lower 48 via a pipeline which was to built by ExxonMobil (NYSE: XOM) and TransCanada Corporation (NYSE: TRP). That idea is still alive technically since it is awaiting approval from the US Federal Energy Regulatory Commission. But for all intent and purposes, it is dead. The US shale boom and plunge in US natural gas prices has made it difficult to justify the project's estimated $40 billion cost.
Alaska's hope was rekindled though several months ago when three of the major international oil companies – ExxonMobil, BP PLC ADR (NYSE: BP) and ConocoPhillips (NYSE: COP) – reached agreement with the state of Alaska to move forward on a $40-$50 billion project to export liquefied natural gas (LNG) to Asia. The companies agreed on a target of 2016 for the large scale project which would include not only a pipeline but a gas liquefication plant to turn the gas into LNG for export to Asian markets.
There is a ready market in Asia for US exports of LNG. Even ignoring China, there is abundant demand for LNG from Japan where all nuclear power facilities have now been shut down. Before the Fukushima accident last March, nuclear generation accounted for about 30 percent of total electricity supply. No wonder then Japan needs some other fuels to power their electric plants and that LNG is selling there for 6-7 times what the US benchmark for natural gas is currently traded.
The Japanese are already hunting for LNG export deals in the United States. In April, its two largest companies – Mitsubishi and Mitsui – signed a 20-year supply agreement to import at least 4 million tons a year of LNG from a new export facility to be built at a site in Louisiana owned by Cameron LNG, a subsidiary of the utility Sempra Energy (NYSE: SRE). The facility could begin exporting LNG to Japan by 2016, if regulatory approval is received.
Probably the key to the success of the proposed Alaskan pipeline will be if long-term contracts are signed for LNG delivery to Chinese energy companies which have been scouring the globe for such deals. It is highly likely that such deals will be forthcoming since final delivery costs for Chinese buyers will be approximately $10 per million BTU, which is less a third of the current rate in Asia.
These contracts with eager Asian buyers will make the project a profitable one for the companies involved and their shareholders. The logistics of the project should be solved within a year, so the only possible obstacle will be a political one if US politicians think its smarter to reinject gas back into the ground rather than selling it on the world market. Hopefully, the politicians will just stay out of the way on this one.
This article was originally written for the Motley Fool Blog Network. Make sure to read all my daily articles for the Motley Fool at http://blogs.ffol.com/tdalmoe/.
Alaska may be able to relive past glories if the huge reserves of stranded natural gas on the state's North Slope can be brought to anxious buyers around the globe, particularly from Asia. Alaska's North Slope has proven reserves of 35 trillion cubic feet of gas, about one-eight of the US total, and unproven reserves estimated at 236 trillion cubic feet. The state already has significant gas production, the equivalent of about 1.5 million barrels of oil a day. But almost 90 percent of that natural gas is reinjected back into the fields because there is no existing way to deliver that gas to customers.
Initially, plans were being laid to ship some of that stranded gas to the lower 48 via a pipeline which was to built by ExxonMobil (NYSE: XOM) and TransCanada Corporation (NYSE: TRP). That idea is still alive technically since it is awaiting approval from the US Federal Energy Regulatory Commission. But for all intent and purposes, it is dead. The US shale boom and plunge in US natural gas prices has made it difficult to justify the project's estimated $40 billion cost.
Alaska's hope was rekindled though several months ago when three of the major international oil companies – ExxonMobil, BP PLC ADR (NYSE: BP) and ConocoPhillips (NYSE: COP) – reached agreement with the state of Alaska to move forward on a $40-$50 billion project to export liquefied natural gas (LNG) to Asia. The companies agreed on a target of 2016 for the large scale project which would include not only a pipeline but a gas liquefication plant to turn the gas into LNG for export to Asian markets.
There is a ready market in Asia for US exports of LNG. Even ignoring China, there is abundant demand for LNG from Japan where all nuclear power facilities have now been shut down. Before the Fukushima accident last March, nuclear generation accounted for about 30 percent of total electricity supply. No wonder then Japan needs some other fuels to power their electric plants and that LNG is selling there for 6-7 times what the US benchmark for natural gas is currently traded.
The Japanese are already hunting for LNG export deals in the United States. In April, its two largest companies – Mitsubishi and Mitsui – signed a 20-year supply agreement to import at least 4 million tons a year of LNG from a new export facility to be built at a site in Louisiana owned by Cameron LNG, a subsidiary of the utility Sempra Energy (NYSE: SRE). The facility could begin exporting LNG to Japan by 2016, if regulatory approval is received.
Probably the key to the success of the proposed Alaskan pipeline will be if long-term contracts are signed for LNG delivery to Chinese energy companies which have been scouring the globe for such deals. It is highly likely that such deals will be forthcoming since final delivery costs for Chinese buyers will be approximately $10 per million BTU, which is less a third of the current rate in Asia.
These contracts with eager Asian buyers will make the project a profitable one for the companies involved and their shareholders. The logistics of the project should be solved within a year, so the only possible obstacle will be a political one if US politicians think its smarter to reinject gas back into the ground rather than selling it on the world market. Hopefully, the politicians will just stay out of the way on this one.
This article was originally written for the Motley Fool Blog Network. Make sure to read all my daily articles for the Motley Fool at http://blogs.ffol.com/tdalmoe/.
Wednesday, December 7, 2011
The Importance of Angola to the Oil Market
Libya has been at the forefront of oil investors for much of the year. The nation of Angola has also been a source of supply disruptions in 2011, helping push crude oil prices higher.
Angola has been a true success story. Over the last decade, it more than doubled its production. Output rose from 750,000 barrels a day in 2001 to a peak of nearly 2 million barrels a day in January 2010.
The bad news for the global oil market is that the west African country, which joined OPEC in 2007, has seen its output fall significantly this year.
In 2010, Angola pumped an average of 1.85 million barrels of oil per day. But in 2011, it has managed to pump out just an average of 1.65 million barrels a day of oil.
Investors may shrug their shoulders and say 'so what?'. After global oil production is roughly 87 million barrels a day and Angola producers about 2 percent of that total.
However, Angola is far more important to the global oil market than appears at first glance.
Angola pumps a particularly low-sulfur crude, which is highly sought after by Chinese and Indian refineries to produce high quality gasoline and diesel.
China bought about 45 percent of the country's oil production last year. The United States and India are the next two biggest buyers, accounting for another third of Angola's oil exports.
So the global oil market has looked with interest as Angola's oil production stalled due to a lack of new projects and glitches in several existing oil fields. There were technical problems (water injection among others) in the Saxi-Batuque field operated by ExxonMobil (NYSE:BP) and the Greater Plutino field operated by BP PLC ADR (NYSE: BP).
The good news now is that the production problems are being solved. In addition, new oil fields are coming onstream.
The Plazflor field, operated by France's Total SA ADR (NYSE: TOT), will add 200,000 barrels of output while several projects from BP will bring another 150,000 barrels online. Additionally, Exxon's Kizomba-D cluster fields will add on another 150,000 barrels a day.
In total, Angolan production capacity should recover by 400,000 barrels a day year-on-year, alleviating some pressure off high oil prices which is good news for consumers.
Angola has been a true success story. Over the last decade, it more than doubled its production. Output rose from 750,000 barrels a day in 2001 to a peak of nearly 2 million barrels a day in January 2010.
The bad news for the global oil market is that the west African country, which joined OPEC in 2007, has seen its output fall significantly this year.
In 2010, Angola pumped an average of 1.85 million barrels of oil per day. But in 2011, it has managed to pump out just an average of 1.65 million barrels a day of oil.
Investors may shrug their shoulders and say 'so what?'. After global oil production is roughly 87 million barrels a day and Angola producers about 2 percent of that total.
However, Angola is far more important to the global oil market than appears at first glance.
Angola pumps a particularly low-sulfur crude, which is highly sought after by Chinese and Indian refineries to produce high quality gasoline and diesel.
China bought about 45 percent of the country's oil production last year. The United States and India are the next two biggest buyers, accounting for another third of Angola's oil exports.
So the global oil market has looked with interest as Angola's oil production stalled due to a lack of new projects and glitches in several existing oil fields. There were technical problems (water injection among others) in the Saxi-Batuque field operated by ExxonMobil (NYSE:BP) and the Greater Plutino field operated by BP PLC ADR (NYSE: BP).
The good news now is that the production problems are being solved. In addition, new oil fields are coming onstream.
The Plazflor field, operated by France's Total SA ADR (NYSE: TOT), will add 200,000 barrels of output while several projects from BP will bring another 150,000 barrels online. Additionally, Exxon's Kizomba-D cluster fields will add on another 150,000 barrels a day.
In total, Angolan production capacity should recover by 400,000 barrels a day year-on-year, alleviating some pressure off high oil prices which is good news for consumers.
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