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No Panic for Big Oil After Chevron’s Warning

The Exchange

Chevron (CVX) was having a rough session Wednesday following its profit warning after the prior close, but investors in the rest of the sector didn't appear particularly overwrought.

That's probably because Chevron's warning had some Chevron-specific elements, but also because there's little good reason to think panic should ensue. While there's room for caution about the petroleum industry, if you're just sitting on the outside wondering, don't interpret the Chevron news as an alarm bell on the whole of Big Oil's future as a profit center.

Late Tuesday, Chevron said it expected third-quarter earnings to be "substantially lower" than the second quarter, when it made $3.56 a share. What happened? Production and refining had some stumbles during the last couple of months, with Hurricane Isaac in the Gulf of Mexico, a fire at the company's Richmond, Calif., refinery, which will probably keep the crude unit closed for the rest of the year, and other maintenance needs. Oil selling prices were hurt, with U.S. crude realizations dropping $8.47 to $95.44 a barrel in the first two months of the third quarter. Domestic natural gas realizations rose 50 cents to $2.67 per thousand cubic feet. Production in the fourth quarter should rise from the third quarter, Chevron said.

Chevron 1-Day Chart

Shareholders never welcome a warning, unless they were expecting something much worse. In this case, Chevron brought an unwelcome surprise. The stock was weakening as the day wore on and was lately down more than 4%, under $113. Trading was heavy in the first half hour of the session before leveling off, but it spiked again right around 12:30 p.m. ET. It should be noted that the shares had their best close ever earlier this month, at $117.96. Chevron's now up 2.1% in 2012, and the company will report its full results for the third quarter on Nov. 2.

Again though, the worst of the damage by far was taking place at Chevron and Chevron alone. Exxon Mobil (XOM), the only U.S. oil company with a bigger market cap than Chevron, was down 1.3% at $90.92. ConocoPhillips (COP) was slipping 0.9% to $57.28, and Marathon (MRO) was off 0.2% at $29.53. Phillips 66 (PSX) fell 2% to $45.19. This amounts to a mild pullback. Nobody's storming the exits.

That's not to say it's all clear on the horizon. Oil companies do have reason to worry, at least to a degree, about the sluggish U.S. economy dragging down demand. Consumers in many parts of the country have been forced to pay wallet-busting prices for gasoline at various times this year -- $40 and $50 fill-ups are punishing -- and every penny more that goes to motor fuel means a penny less for somewhere else in the economy. Last month, data from the American Petroleum Institute, an industry trade group, said U.S. petroleum deliveries in August declined 4.3% from the same month in 2011, totaling 18.6 million barrels a day. That was an increase from July, but for the year to date, demand is running 2.6% below last year.

"Given the nation's weak employment situation, it's no surprise petroleum demand was off," API chief economist John Felmy said in a statement accompanying the numbers. "Contraction in the manufacturing sector probably also reflects the slipping numbers."

So there is reason for concern about current and future demand. That's entirely fair. Even so, the U.S. Energy Information Administration, the statistical unit of the nation's Energy Department, isn't overly gloomy on the hydrocarbons sector's near-term prospects. The agency believes domestic crude output will average 6.3 million barrels a day this year, up 700,000 barrels from 2011. In 2013, U.S. production is expected to climb to 6.9 million barrels a day, which would be the highest production level in two decades.

For oil prices, the EIA predicts Brent crude will fall throughout the rest of the year and into next, when it sees an average price of $103 a barrel, though it says "a lingering supply risk because of instability in the Middle East and North Africa could keep prices higher." West Texas Intermediate spot prices should be about $93 a barrel in 2013, the EIA forecasts.

Globally, crude and liquid fuels consumption is expected to grow through next year, with China and other emerging markets driving nearly all of the increase.

Production stoppages in the Gulf of Mexico averaged about 210,000 barrels a day in both August and September, with Hurricane Isaac contributing to that, according to the EIA. So it's entirely possible we'll hear from other energy companies beyond Chevron in the days ahead. Earnings shortfalls certainly aren't ideal, but keep it in perspective. Chevron's issuing a near-term warning, not a long-term vision of where it believes the industry is headed.

Stocks in the oil universe are reflecting that today, so if you're looking for the big "what it means," it's probably this -- it's a bit of unpleasantness, but hardly the end of the world. Fossil fuels are just too much a part of the working of modern society for demand to fall off a cliff overnight. Commerce may eventually grind to a halt, or alternatives might steal more market share in the future, but for now and likely for some time, oil's in charge.