Doom and gloom in oil

This week’s volatility in crude oil prices shows just how frail market sentiment is: a run-up to $70 in Brent was quickly shattered by yesterday’s news of a bigger than expected inventory build in the US.

And the sentiments from big oil companies reporting this week are not helping, either.

BP’s chief executive Tony Hayward was unremittingly bleak on the industry outlook on Tuesday,  saying he was “not counting on a recovery any time soon” and today his counterpart at Shell, Peter Voser, had a similar take.

Voser says there is an overhang of as much as 15m barrels per day in capacity:

“Global energy supply is increasing at 10 per cent this year… there is ample energy supply and not enough demand today. This is quite a turnaround from a year ago. ”

“We simply don’t know when the global economy will recover and we have to plan on the basis that this downturn will last a long time.”

Shell’s chief financial officer Simon Henry said while retail fuel sales had risen in the US, demand just about everywhere else was weak.

As well as hacking into their own operational costs, Shell and BP are aggressively pursuing lower costs from suppliers and services firms. And this is where oil services firms like Halliburton and Schlumberger, come in.

Most of those have already announced significant job cuts this year and massive falls in profits, but they managed to beat expectations. Andrew Gould of Schlumberger said on Friday he was ‘less pessimistic’ than a few months ago, but signalled there could be more difficult times to come.:

“There is one element of this cycle that we don’t understand: What will our customers do when their cash flows really start to be crimped?”

He will not be reassured by comments from Shell’s Voser today that while cost pressures were easing, they are “still high by historical standards”.

BP on Tuesday said it had already gained some of the savings from suppliers it has been talking about for months. But it is still pursuing more. And about those cash flows:

However, BP needs an oil price of about $60 to be able to cover its dividend payments and capital spending programme, which will cost $19bn-$20bn this year, from its cash flow.

Related links:

Voser warns of further job losses at Shell (FT, 30/07/09)
BP chief expects slow recovery (FT, 28/07/09)

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