Optimism About Oil Barrels Ahead

DALLAS (The Dallas Morning News/TNS) -

Oil prices are up more than 30 percent over the last six weeks. Profits from the likes of Exxon Mobil and Shell, while down considerably from a year ago, aren’t as bad as predicted.

After months of dire news for the oil-and-gas industry, recent events are forcing some to ask the question: Could the crude downturn be turning around?

Driving the optimism is the U.S. rig count, said Scott Mitchell, an analyst with the research firm Wood MacKenzie. It is down to just 703 rigs nationwide — its lowest level since 2010, according to the oil-field-services company Baker Hughes. If that drilling slowdown continues, it will eventually cause U.S. crude production to decline and shrink the gap between supply and demand in the world’s oil markets.

Alongside predictions that the U.S. won’t lift sanctions on Iranian oil as quickly as expected and shifts in the world’s currency market, there has been plenty for oil traders to get excited about. West Texas Intermediate, the U.S. benchmark, closed at more than $58 a barrel Thursday. While a long way from the $100-plus prices the industry enjoyed last summer, that’s up $15 since March 17.

“We weren’t anticipating a rebound until” later in the year, Mitchell said. “It’s a pretty strong rebound. The question is: Will it continue? And at what pace?”

Already, the larger companies are showing an ability to bring their spending in line with current crude prices, said Pavel Molchanov, an energy analyst with Raymond James.

Irving, Texas-based Exxon reported Thursday a $4.9 billion profit in the first quarter of 2015, down from $9.1 billion a year ago and its lowest since 2009. But it was still more than 40 percent above the consensus estimate by analysts, as Exxon reported growth in its refining operations and sharp cuts in capital spending and share buybacks in an attempt to rein in costs.

“First-quarter results for everyone are a real black box. There was so much commodity-price volatility. We’ve seen some companies come in way above, some way below. Exxon came in above,” Molchanov said.

Likewise, Shell, the European oil giant, reported that its profits were down more than 50 percent from a year ago, to $3.2 billion. That beat the $2.5 billion estimate of 12 analysts surveyed by Bloomberg News.

For now, most analysts are predicting that oil prices will stay close to their current level in the months ahead.

While the world rig count is down, the amount of oil in storage is at near-record levels and is expected to come onto the market quickly if prices increase. U.S. oil storage stocks — though climbing more slowly than they were a couple of months ago — are now approaching 450 million barrels, according to the U.S. Energy Information Administration.

Most analysts are expecting oil prices of around $65 a barrel by year’s end as the slowdown in new projects hits the market.

“Oil prices need to move higher,” said Bill Herbert, managing director at the investment firm Simmons & Co. “That said, I don’t think anybody in their right mind is thinking a return to high-double-digit or triple-digit in the next couple years.”

Nowhere was the decline in oil prices more apparent than in Exxon’s U.S. oil-and-gas production, which reported a $52 million loss — last year, that division made a $1.2 billion profit.

And with many more oil companies still to report profits, analysts are questioning how the companies that led the U.S. shale-drilling boom, like Pioneer Natural Resources in Irving and EOG Resources in Houston, fared last quarter.

“The integrated (companies) have done pretty well through the downturn. The shale players are going to be more interesting. That may trigger some M&A activity,” Mitchell said.