- Oil prices drop with falling labor numbers
By Kishori Krishnan Exclusive to Crude Investing News
The United States government statement that U.S. employers had slashed over a half million jobs in January, the highest yet in 35 years, lead to crude oil prices dropping just below $41 a barrel, way below the high of $147 a barrel last summer. There is a link between layoffs and the demand on oil, say analysts, as those laid off see no need for the daily commute, and buy less of petroleum products like toys and raincoats.
Light, sweet crude for March delivery dropped a dollar to settle at $40.17 a barrel on the New York Mercantile Exchange. Crude prices had traded as low as $38.60 a barrel in intra-day trading while investors digested a government report that said 598,000 jobs were lost in January. The Labor Department report also said unemployment rate rose to 7.6 per cent, the highest since 1992. In the whole of last year, the U.S. saw 2.9 million job cuts, according to revised figures released by the government.
It has been a roller coaster ride so far. In 1999, the price of oil hovered around $16 a barrel. In July 2008, it reached a peak of $147 a barrel. By the end of 2008, as most of the world fell into recession, prices plunged to below $49 a barrel, a roller coaster ride that left both producers and consumers confused.
But 2009 may be different say analysts. Even Exxon Mobil, they say, notched up a profit of $45.2 billion for all of 2008, breaking its own record for a U.S. company, largely from crude’s triple-digit prices in the first part of the year. Exxon’s profit tumbled 33 per cent in the final three months of 2008, as oil prices sank 60 per cent. not to miss out the fact that even though the world’s biggest publicly traded oil company, by posting a profit at all, did better than some rivals, a few of the latter actually posted aloss for for the last quarter.
Crude’s rapid descent at the end of 2008 pushed down earnings for many to the lowest level in several years. Among the losers were European giants Royal Dutch Shell PLC and BP PLC. Shell had a net loss of $2.81 billion in the fourth quarter, its first quarterly loss in a decade. BP was $3.3 billion in the red, its first quarterly setback in seven years.
The positive news is that to date, the oil and gas sector has by and large, avoided the big layoffs so much a norm in other parts of the economy.
Alberta, which produces two-thirds of Canada’s oil and gas, has travelled the beaten path. The wrenching oil slump of the 1980s still looms large in the public consciousness. Companies fled the province and thousands abandoned homes that they could no longer afford. “The situation is much different this time,” insists the energy minister, Mel Knight, whose Progressive Conservative Party has ruled the province since 1971. Knight believes that continuing demand from places such as China and India will mean that oil, and thus his province’s economy, will recover faster this time.
There is a lurking thought amongst some traders to eventually push the price of crude to the post-$50 dollar a barrel price. “You get the sense the market wants to go higher,” said an analyst, adding, “Those who sell at $40 are going to get tired of doing that. Eventually they’re going to hop on board and push this thing to $50.”
Investors are keeping their fingers crossed, looking with hope at developing countries like India and China for signs of how far the global recession has spread. Chinese factories are expected to continue to pump up oil demand. At close on Friday, despite the drop in crude oil prices, most of the oil majors like Royal Dutch Shell and B.P. still closed a bit high at the New York Stock Exchange.
Around the world
In the wake of the oil price drop came a statement by Iraq’s oil minister Hussein al-Shahristani who said he expected Organisation of Petroleum Exporting Countries (OPEC) to cut production in a bid to raise the minimum price to US$70 a barrel. The Minister said this could happen when OPEC met in March.
Iraq’s Oil Minister also said that the Iran-Iraq talks on joint oilfields were going ahead well and an oil deal was expected to be signed by March 20, according to Iranian news agency, IRNA. The agreement is to be inked in line with Iraq’ efforts to develop its oilfields and increase oil and gas exports, Shahristani said.
Spokesperson for the Iraqi oil ministry Asem Jahad said that his country intends to develop its oilfields based on a five-year plan and increase its oil export to four million barrels a day from 1,700,000.
In India, the state-run oil producer, Oil and Natural Gas Corporation, has discovered two new oil wells in Patan district in Gujarat, which have estimated oil reserves of over one million tonnes, according to a government announcement. The oil find comes at a crucial time as the upstream major’s Mehsana production unit in Gujarat was witnessing a fall in output. The output at ONGC Mehsana, which was around 8,000 to 9,000 tonnes a day when the unit was set up in 1968, came down to 6,000 tonnes a day over the years. Similarly, the annual production has come down to 2.25 million tonnes from 3 million tonnes.
Elsewhere in India, the seismic survey to strike oil in Assam’s North Cachar Hills came to a halt with the Indian Oil Tanking Limited temporarily suspending operations in the troubled district. The move has come after four surveyors of a Chennai-based company were abducted by suspected militants of the Gorlosa faction of the Dima Halam Daogah from the work site.
State-owned Hindustan Petroleum Corp Ltd (HPCL) is set to triple crude oil import from Iran while reducing supplies from Iraq next fiscal. HPCL plans to import 3 million tonnes of Iranian crude from National Iranian Oil Co. on term contract in 2009-10 as against the current year import of one million tonnes, sources said. A Press Trust of India report said HPCL’s total crude oil requirement for 2009-10 has been estimated at 15.50 million tonnes. Considering the availability of domestic crude oil at 4.58 million tonnes (based on the 2008-09 allocation), the imported crude oil requirement is estimated to be 10.92 million tonnes.
Amidst news of layoffs, there is some cheer. An AP report said, refinery workers belonging to the United Steel Workers union will receive a 3 per cent pay increase and a $2,500 signing bonus as part of a new tentative pay package with employers, according to a union statement Friday.
As part of the three-year deal, refiners will also pay 80 per cent of workers’ health insurance costs. The signing bonus includes $1,000 for ratifying the contract and $500 per year to cover out-of-pocket medical expenses. The settlement, first announced Tuesday without specific details, must still be ratified by local union bargaining units. The local affiliates have the option of negotiating for higher benefits.The union represents 30,000 employees in the oil industry.
Profit in oil
One oil and gas company, ARC Energy, (TSX: T.AET.UN) has said they can show a profit at $5 gas on many of their new HD wells. Research analysts are quoting other western Canadian plays could be profitable at CAD$4.50 gas.
British energy giant BP, while posting a fourth-quarter loss, has warned that demand would probably continue to drop in the coming days as global recession deepened. BP, Europe’s second-biggest oil company behind Royal Dutch Shell, had a loss of $3.3 billion, or 18 cents a share – its first quarterly deficit in seven years. BP had a profit of $4.4 billion, or 23 cents a share, in the period a year earlier. Chief Executive Officer Tony B. Hayward warned that record earnings might not return for some time.
BP is not off the mark. Compared to other sectors, oil majors have had a profitable run in 2008, making even U.S.Congress press them to explain soaring fuel prices and their profits. Just last summer, crude neared the unprecedented price of $150 a barrel, and giants such as Exxon Mobil and Chevron were raking in income like never before. In last year’s third quarter — the July-September period — Chevron, for example, reported the largest quarterly profit in its 129-year history.
While it’s still early days in the ongoing exploration for the tight gas and shale gas in North East British Columbia and North West Alberta, several gas bearing basins are estimated to have a combined total of more than 1000 trillion cubic feet of gas!