Oil Glut Reduces Industry’s Appeal

When there’s an excess of oil, as is currently the case, it becomes easier to identify strong performers.

Much of Exxon's growth is due to its $60 billion acquisition of rival Pioneer Natural Resources. I Photo: ExxonMobil

Exxon Mobil’s robust balance sheet and diversification make it appealing, though only on a relative basis.

The abundance of crude suggests that industry returns are likely to weaken further, Reuters Breakingviews columnist Robert Cyran wrote. Exxon reported that it generated $8.6 billion in net profit in the third quarter, with production surging 25% from a year earlier.

Much of the growth is due to its $60 billion acquisition of rival Pioneer Natural Resources.

However, falling commodity prices led to a 5% decline in earnings. Rivals Chevron and ConocoPhillips experienced even steeper declines, with earnings down 31% and 25%, respectively, despite increased crude production.

The current glut suggests more of the same. The Organization of the Petroleum Exporting Countries (OPEC) and its allies are sitting on record levels of spare capacity.

Excluding Libya, Iran, and Russia, OPEC and its allies have over 5 million barrels per day (bpd) available within 90 days that can be pumped for a sustained period, according to the International Energy Agency (IEA).

The IEA estimates that global demand will grow by no more than 1 million bpd in 2024 and 2025, while supply will increase by 1.5 million bpd in both years, with most of the growth coming from outside OPEC.

U.S. production has already surpassed 13 million bpd and continues to rise, making it more difficult for the cartel to trigger a price increase.