A Good Earnings Season--Can Oil Companies Do It Again?

Good earnings depend on good prices and those depend on OPEC production decisions. Or do they?

Oil companies are reporting healthy 2003 earnings. Some are reporting records. Crude oil prices have been strong--at or above OPEC's target range. That gets a lot of credit for the earnings.

Now OPEC has to decide whether to hold its present production levels or recommend increases. Its next routine consideration of this question comes at its scheduled February 10th meeting in Algeria. The usual question is: What will OPEC do?

One indicator is improving oil company earnings, which many take to mean it is time to increase production and bring prices down.

Earnings Up
Last week and this week, oil companies reported better earnings for 2003. Amerada Hess made $0.71 a share due in part to improved prices. In 2002, it lost $4.20, aggravated by a write-down for an oilfield in Equatorial Guinea. Ashland Inc., a refiner that buys crude oil, earned $0.49, saying improved prices helped, but earnings were held back by the sharp rise in crude oil prices in December.

ConocoPhillips reported net income of $6.91 per share, compared to a net loss of $0.61 per share in 2002. During 2002, however, for eight months, revenues were for Phillips alone, with the ending four months representing the combined ConocoPhillips company earnings. Kerr McGee, an E&P company, earned $0.50 per share, compared with a $3.45 a share loss in 2002. The company said higher prices and lower exploration costs combined for the improvement. Marathon Oil said quarterly profits rose on higher energy prices and a hefty gain for asset sales. Marathon Oil had earnings of $4.26 a share, compared with the prior year's $1.66. The company said it made nine discoveries in 2003 of significant exploratory wells in Angola, Norway, the Gulf of Mexico, and Equatorial Guinea.

Oil service company Schlumberger reported higher quarterly earnings because of increased drilling activity. The company had fourth-quarter net income of $0.30 per share. In the year-ago quarter, it had a net loss of $4.92 per share, after a restructuring charge. Schlumberger Chairman and Chief Executive Andrew Gould in a statement said he expects an increase in drilling activity. "Any sustained economic recovery and the consequent increase in demand coupled with the acceleration of the underlying rate of decline of the world's aging production base will require higher E&P (exploration and production) investment going forward," he asserted. "Current signs are that the customer base is beginning to respond to this need."

ExxonMobil was scheduled to release its earnings on Thursday, January 29th, and Shell's earnings report is scheduled for February 5.

Norway Calls for More Production
Last week, oil futures prices fell as securities analysts looked ahead to softening demand and the OPEC February 10th meeting. OPEC will review its output policy then and could leave production unchanged at 24.5 million barrels a day. Many market watchers worry that the cartel will slash output further in the face of softening demand. Others think OPEC should increase production.

One of the latter is Norway, whose Minister of Petroleum and Energy, Einar Steensnaes, said he believes OPEC and major independent oil producers should boost production and bring oil prices down to help the global economy.

Norway's position has always favored a price band that dips lower than OPEC. Norway calls for prices between $20 and $30 per barrel as fair. OPEC's current range is between $26 and $28.

Steensnaes said he believes that oil prices remained very high not only due to the lack of balance on the market but also due to political instability in the Middle East. "I think the price could be reduced in the second quarter of this year," he stated.

A UPI analysis of oil supply, published here earlier this week, quoted the OPEC position that low U.S. crude inventories don't indicate tight supplies because U.S. refineries have adjusted inventories over the years so that higher inventories are not needed.

One of the world's premier oil industry analysts takes a different view, however.

Prices Reflect Genuine Shortage
The Center for Global Energy Studies (CGES) said early this week that "Oil prices reflect a genuine shortage of oil in the market." The London-based energy consultants remarked further that high oil prices, 30-year-low U.S. commercial petroleum stock levels, and high shipping costs were "market signals in no uncertain terms that the world is short of oil."

According to the CGES report, year-on-year demand could grow 1.5 million barrels a day. OPEC may not have to make any production cuts to defend prices because demand grew more than expected in 2003 and will continue to grow this year.

So what can we expect from oil prices? Do low U.S. refinery stocks result from a real shortage as CGES says or just judicious, just-in-time management by U.S. refineries as OPEC explains it? Should OPEC open the tap and bring prices down to encourage the world economy as Norway's oil minister suggests? Or can they? We likely won't get an answer on February 10th, but we'll have one more indicator.