Slippery Slope for Oil
Lower demand, lower prices, much lower free cash flows.
It's hard to be bullish on commodities after reading these types of statistical datapoints, especially when you consider that Europe isn't the world's foremost producer of things(China is), and thus natural gas there primarily goes to heat homes. (Here, watch UNG, USO and DIG.) Of course, there's another side to this story. Gazprom will be cutting capital expenditures to cope with lower demand and lower gas prices (natural gas prices lag oil prices).
Gazprom, despite being government-controlled, isn't a unique case. Oil and gas companies are facing lower demand and sharply lower prices, and thus, much lower free cash flows are causing them to slash production and capital expenditures. Capital expenditures are easier to cut out of the 2. Those are the future revenues -- and thus, future problems -- which, at least from today's perch, pale in relevance to management.
Lowering production is a bit trickier for both oil and gas companies, as that impacts current revenues. Oil- and gas-rich nations like Russia, countries in the Middle East, and Venezuela, all face a similar problem: They stand on one leg -- petrochemicals -- and that leg is being undermined by a global decline.
However, their social obligations have ballooned during time of prosperity - cutting production lowers already-declining revenues, while social obligation costs don't decline.
What does this all mean? Lower demand for petrochemicals in the short run is becoming a certainty. Lower production in the short term isn't certain, though it's very possible (OPEC, to my surprise, did reduce production so far, but will it be able to maintain it?).
In the longer run, the supply of petrochemicals won't be robust; it will decline. It will take high oil and gas prices to cure that problem, as it always does.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter