Crude oil prices are trading 1% lower today following a 3.1% jump yesterday after the Commerce Department released the Gross Domestic Product figure for the third quarter. The GDP report detailed the U.S. economy had expanded by 3.5% in the quarter; the first increase in four quarters.
Despite today’s sell-off, oil futures have risen 79% for 2009, and are set to gain 12% in October; the biggest monthly increase since a 30% rally in May.
Historically, oil prices have been viewed as a proxy for economic growth. The common feeling from traders at the New York Mercantile Exchange is as the global economy grows, so goes oil. In other words, if developed economies are seen expanding, demand for oil-produced products will be the true benefactors. The outstanding question now is will the U.S., and globalization, return to a stable, more prosperous economic environment?
“It’s going to be a rocky road ahead for real demand growth,” said Andy Sommer, an analyst at Elektrizitaets-Gesellschaft in Dietikon, Switzerland, to Bloomberg News. “We still have that huge inventory overhang. The trend towards the end of the year should not be above $80 but back towards $70.”
Oil prices have provided healthy returns for futures investors, but haven’t bode well for the mega-cap oil and gas companies. Exxon Mobil (XOM:NYSE), ConocoPhillips (COP:NYSE) and Chevron (CVX:NYSE) all reported third quarter earnings this week, and the results were poor, at best, when compared with the meteoric rise in crude prices seen during the summer of 2008.
Chevron, Exxon Mobil and Conoco Phillips all reported profit losses for the quarter, dropping 51%, 65% and 71%, respectively. The main reasons for the drop were twofold: Lower average prices for crude and higher refining costs.
For example, just as the Associated Press reported, Chevron’s average sale price for crude and natural gas liquids over the past three months was $62 per barrel, which is better than last quarter, but well below the $103 it fetched during the same period last year.
The AP added, “Higher crude prices come with their own costs for integrated companies like Chevron, because it costs more for their refineries to make fuel even if less is being used during the economic downturn.”
“We continued to experience weak margins on the sale of gasoline and other refined products,” said Chevron Chairman and CEO Dave O’Reilly during the company’s conference call. “Weak demand and plentiful supply affected all our major markets.”
Looking forward, sentiment seems to pull both ways as far as whether crude prices can continue rallying, and if the three oil giants will begin posting higher profits. Ultimately, though, economic growth needs to provide evidence of sustainability to increase demand.
“When it comes to positive U.S. macroeconomic data there is only one way for the oil price to go,” Tamas Varga, an analyst with PVM Oil Associates Ltd. in London, said in a report obtained by Bloomberg News. “If the performance of the market this month is anything to go by, then the next $25 move is more likely to be to the upside.”
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