Why Oil Inventories Are Falling Today

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What happened

Oil prices fell today. West Texas Intermediate (WTI), the main benchmark price for U.S. oil, fell 9.2% to close at $98.45 a barrel, its lowest price since May 11. Meanwhile, the global oil benchmark, Brent crude oil, fell 9% to close at $103.29 a barrel. barrel, its lowest point since May 10.

This fall in oil prices triggered a sell-off among oil stocks. The big oil giants Chevron (CLC -2.64%) and ExxonMobil (XOM -3.12%) were down about 5% at one point in the trading day while leading refining Phillips 66 (PSX -4.72%) was down 7.4% on the day. Here’s a look at what’s causing the downdraft in the oil sector and what it means for those oil stocks.

So what

Oil prices plunged after Independence Day, fueled by growing concerns about demand and the surging US dollar against other currencies. Concerns are growing that the global economy could slip into a recession, driven by higher interest rates to fight inflation. This would likely impact demand for gasoline, diesel and jet fuel as consumers reduce discretionary spending, including travel. Meanwhile, the rising US dollar is making it more expensive to buy oil in foreign currencies, which could weigh on demand.

If crude prices continue to fall, it could impact future cash flows produced by oil companies like Chevron and Exxon. However, most oil companies are likely to report stellar profits for the second quarter just ended, thanks to high oil prices during the period. ExxonMobil has already disclosed that it expects its refining profits soared to $5.5 billion in the second quarter. In addition, the oil giant sees profits from its upstream oil and gas production business increase to $3.3 billion. This allows the company to be able to produce up to $19.5 billion in profit over the period. The company plans to return a growing share of that windfall to shareholders through its share buyback program, which it tripled to $30 billion earlier this year.

Chevron also appears poised to deliver a spurt of second-quarter earnings. Although it does not have as large a refining business as Exxon, it is a major oil producer. As a result, it will benefit from the rise in crude prices in the second quarter. Chevron’s growing cash flow gives it more money to return to shareholders – it raised its dividend again this year and authorized a $10 billion buyback program. It also allows Chevron to accelerate its shift to low-carbon fuels.

Finally, these good refining market conditions should be a boon for Phillips 66, given its focus on refining. The improvement in the refining market this year allows Phillips 66 to generate more cash. This allowed Phillips 66 to increase its dividend, resume its stock buyback program and pay off $1.45 billion in debt. It also enabled the company to move forward with an $850 million project to convert a California refinery into a renewable fuels facility.

Now what

Oil prices have cooled considerably in recent weeks and are now back below $100 a barrel in the United States. However, oil and refined product prices are still relatively high. Because of this, oil companies are likely to report skyrocketing Q2 earnings. Meanwhile, they could again produce strong results in the third quarter if oil prices remain high. As concerns grow that a recession could lead to a continued decline in oil prices, there are many upside catalysts, including ongoing supply issues following Russia’s invasion of Ukraine. . Given these conflicting dynamics, oil prices will likely continue to fluctuate wildly over the coming months, leading to greater volatility in oil inventories.

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