Is Declining Oil Price The Only Concern?

Declining oil prices have enabled the US to increase its strategic reserves, with oil imports remaining high and indigenous oil production still hovering at record high levels, above 9.2 million barrels a day. Reportedly the US crude inventories have surpassed the 500 million barrels milestone. Two of the global benchmarks, WTI and Brent, bounced up and down throughout the week ending February 5. However, faltering global economies offer a chance for the US Fed to not hike the interest rate, resulting in weak dollar and pushing oil prices even higher.

The western media is trying to create an impression that the collapse in oil prices is now bleeding over into the broader global economy. They talk about the ongoing downturn in oil exporting countries, from Saudi Arabia to Russia, Venezuela, Iraq, Nigeria, and others. In doing so, they have a strange rationalization that cheap energy should bolster consumption, but the fact is that the drop in commodity prices has been so sharp that questions continue to arise about the credit-worthiness of some oil producers, with Venezuela topping the list. With billions of dollars in debt due this year and a rapidly shrinking ability to deal with the crisis, a debt default may not be too far off.

Citigroup added its voice to those concerned about the health of the global economy, citing four interlinked forces – a strong US dollar, low commodity prices, weak trade, and soft growth in emerging markets – for the sudden fragility and potential for a global recession. “It seems reasonable to assume that another year of extreme moves in US dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks,” Citigroup analysts warned.

ConocoPhillips (NYSE: COP) made news this week when it became the first US-based oil major to slash its dividend. Italian oil giant Eni (NYSE: E) was the only other oil major to have done so – it cut its dividend almost a year ago. ConocoPhillips cut its dividend by 65 percent this week, and the company’s CEO argued that the move would save $4.4 billion in 2016.

The oil majors are having trouble covering spending and also their shareholder payouts with their underlying cash flow. By and large, they are making up for the shortfall with new debt. Chevron took on an additional $9.6 billion in debt to cover dividend obligations, ExxonMobil added $10.8 billion in fresh debt, and BP took on another $4.6 billion. At some point, something has to give. S&P downgraded a long list of oil companies this week, including Chevron and Shell. It also put BP and ExxonMobil on review for a possible downgrade.

A quick rundown of the full-year earnings from some of the oil majors:

  • BP (NYSE: BP) lost $6.5 billion in 2015, one of the company’s worst on record.
  • ConocoPhillips (NYSE: COP) posted a loss of $4.4 billion in 2015.
  • ExxonMobil (NYSE: XOM) saw profits halve to $16.2 billion.
  • Royal Dutch Shell (NYSE: RDS.A) posted a profit of $3.8 billion, down 80 percent from 2014.
  • Chevron (NYSE: CVX) reported a loss of $588 million, its first loss since 2002.

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