See Oct. 7's "Oil--Trading the Brent/WTI Spread: Goldman Says It Is Not Going to Zero (and why refineries are sucky-suck suck investments right now)".That's the immediate answer, see for example Oct. 31's Financial Times: "Refining overcapacity hits oil majors":
Squeezed margins in the global refining industry are hurting the world’s largest oil companies, as Royal Dutch Shell, Total and ExxonMobil all blamed poor quarterly earnings on a decline in their downstream businesses.
Results from Shell were the most disappointing Thursday, as its profit dropped almost a third to $4.5bn. ExxonMobil’s profit fell 18 per cent to $7.87bn, while Total’s declined almost a fifth to €2.72bn....MORE
However in this post at The Barrel the guest writer looks into a longer term and more worrying problem.
From Platts:
In another of our occasional guest blogs, Steven Kopits of the New York office of Douglas-Westwood Associates, an energy business analyst firm. He looks at the relationship between the ability of an economy to shoulder a certain oil price level and what that means for the companies that produce that commodity. If you’d like the firm’s full presentation on this issue, Steve can be reached at steven.kopits@douglaswestwood.com.
As in the second quarter of the year, third quarter results for the oil majors, the international oil companies and other major listed operators, were disappointing. Some were downright awful.
Why have results for the oil companies deteriorated so markedly, and what should we expect in the future? In this article, we’ll look primarily at upstream liquids—primarily crude oil production.
Historically, when crude oil consumption has reached 4.25% of GDP in the US, the consumer has chosen to reduce consumption rather than accept further price increases. This number represents a Brent oil price of $103 / barrel today. The equivalent numbers for China are about 6.25% of GDP and $120 / barrel, Brent basis. Take the combined average, and the global “carrying capacity”, the price the global economy as a whole can manage, is about $112 / barrel Brent, just a few dollars above recent Brent prices. Increasing oil prices from here means increasing carrying capacity, which is fundamentally a function of GDP growth and oil efficiency gains. In theory, this number (including dollar inflation) could reach 7% per year; empirically, it has averaged 4.5% per average in the last half decade. Thus, in our models, the oil price can increase, but not at nearly the 20-25% rate we saw from 2003 until 2011 (allowing for the recession). And as a practical matter, oil prices are essentially unchanged over the last two years.
At the same time, exploration and production costs have been rising at an 11% pace. Thus, costs have been rising faster than revenues, and this in turn has been putting pressure on upstream margins, which are 1-3% of revenues lower than a year ago.
Most of the large operators now require $120-130 / barrel Brent to maintain their current dividend and capex programs. As this is not forthcoming, oil companies are re-thinking their investment strategies and portfolios. “Capital discipline” has become a watchword in investor presentations, and most operators have significant divestment plans now in place. But they have not been able to cut dividends, as investors are increasingly demanding cash rather than growth....MORE
