Chevron Corporation reported in its interim update late Monday that earnings for the fourth quarter 2009 are expected to be lower than in the third quarter 2009. Upstream earnings are projected to be in line with third quarter results, but downstream results are expected to disappoint due to poor refining margins.
Get used to it.
That is going to be the theme through the fourth quarter earnings season. What’s more, at the rate in which this year opened, losses in the downstream will temper upstream earnings through the first quarter earnings season as well. As such, Chevron et al. have taken measures to address this issue. In Monday’s statement Chevron reported that during the first two months of the fourth quarter, U.S. refinery crude input volumes were down 50 Mbbl/d or around 6%.
That was 50 Mbbl/d of crude oil demand that went missing in the first two months of the fourth quarter from just one company. Of course, Chevron was not alone. Per the latest monthly numbers from the DOE, U.S. refinery crude oil inputs in October 2009 were 499 Mbbl/d or 3.4% below October 2008. Inputs per the DOE’s weekly reports through November and December averaged 637 Mbbl/d or 4.4% below a year earlier.
The apparent lack of demand at the end of last year to boil oil by the only guys who actually demand wet barrels of crude oil did not lessen Wall Street’s appetite to own the paper version.
Speculators currently own more than twice the capacity at the NYMEX delivery hub. What are they going to do with all of this oil? If Chevron, the second largest U.S. oil company, cannot make money with $70 oil (the company’s U.S. realization from its upstream operations was $69.92 in October and November), then why does Wall Street think $80, $90… is justified? Here at The Schork Report we are telling our client this: “It’s not. “
That is why when Chevron sneezed, refiners like Sunoco and Valero caught colds, i.e. Chevron’s share price was down only 0.6% in the wake of its press release, thanks to an increase in its upstream production. At the same time shares of Sunoco and Valero were down 3.6% and 1.6% respectively, hence the move by these and other refiners and marketers to mothball units on the fringe.
All told, 446 Mbbl/d of European and North American refinery capacity was closed permanently
in the fourth quarter. Another 663 Mbbl/d was fully shutdown indefinitely and 560 Mbbl/d was partially shutdown.
Therefore, upwards of 1.7 MMbbl/d of demand for crude oil disappeared at the end of 2009 because refiners could not pass on the cost of crude oil to consumers in Europe and North America. Is there a link between these closures and the disappointing December employment numbers from Europe and the U.S. we saw last Friday? Of course there is.
Does Wall Street care? Evidently not.
After all, who cares about hard statistics from Europe and the United States when you can ponder to clients on… let’s be polite… less than clear… assumptions regarding Chinese consumption?
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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.