As the markets swoon today from Friday night’s downgrade of US debt, Standard & Poor’s is making other changes to its debt ratings. One sector that is unchanged is oil and gas, about which S&P says that it believes “robust oil prices are sustainable throughout the remainder of the year and into 2012, which benefit any producer focused on oil and natural gas liquids.”
The S&P ratings note affects integrated oil and gas biggies like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP) as well as E&P companies like Apache Corp. (NYSE: APA) and Chesapeake Energy Corp. (NYSE: CHK). Field services firms and drilling contractors are also rated stable. These are firms like Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI), Noble Corp. (NYSE: NE), Transocean Ltd. (NYSE: RIG), and Diamond Offshore Drilling Inc. (NYSE: DO). S&P is upbeat on refiners as well, which means Valero Energy Corp. (NYSE: VLO), Tesoro Corp. (NYSE: TSO), and Marathon Petroleum Corp. (NYSE: MPC) ought to prosper.
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Unfortunately, the market has fallen about -2.5% so far this morning, and all these oil and gas companies are getting an even worse beating. That is due to the price of oil falling below $84/barrel on the belief that the global economy is still weak and will get weaker before it improves.
S&P puts its forecast for WTI crude in 2011 at $97.67/barrel and for 2012 at $103.59/barrel. Those prices would indeed be good news for the oil & gas sector. S&P notes that consumers have not cut back significantly on driving either, further propping up demand for oil.
Demand for oil could also boost prices for natural gas according to S&P, although the firm warns that over-supply will set the course for natural gas prices.
It’s difficult to know what to make of S&P’s note. If oil prices remain high, then the companies will make profits. But oil prices will suffer if the US — and the global — economy doesn’t improve faster than it is at present.
To some degree this is a perception issue. High US unemployment lowers the amount of gasoline commuters require and also lowers the amount of gasoline US consumers need for vacation or discretionary driving. And even though the US no longer drives the global demand for oil, cuts in US demand punch way above their weight among oil traders. Some of that has to do with oil being priced in dollars.
As the economy weakens, the dollar weakens and that should drive up the price of oil. Dollar weakness becomes, in effect, a hedge against falling demand for oil. To that extent, S&P is probably correct to anticipate higher prices for oil.
And while it’s always dangerous to talk about US consumer sentiment, the S&P downgrade “reflects our view that the effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges.” If the downgrade of US debt can be based on taking a political temperature reading, then gauging US consumer sentiment can figure significantly into forecasting oil prices.
Exxon Mobil shares are down about -3%, roughly equal to the DJIA decline, while Chevron and Conoco are both down between -4.5% and -5%. Chesapeake is off around -6%, at $28.76, in a 52-week range of $19.68-$35.95. Services firms are down anywhere from -4.5% to nearly -7%, as are drillers. Refiners are taking the most punishment, with Tesoro down more than -9% to $19.48, in a 52-week range of $10.77-$28.74.