The CEOs of U.S. energy companies had been hoping the second half of 2015 would deliver a recovery in oil prices, but now, almost a year after prices started to fall, oil is tumbling again, dipping to six-month lows this week.
In response, energy companies are preparing cost-cutting measures -- laying off workers, reducing spending and taking other financial steps, analysts said. The price drop also could mean more cuts for Murphy Oil Corp. The El Dorado-based company said last week that it cut its workforce by 7 percent in the second quarter.
"In the first half of this year, most upstream companies and oil-field services were certainly hoping that the back half of the year would provide an environment where crude prices strengthened," said Bill Ebanks, managing director at AlixPartners LLP and co-head of the firm's Oil & Gas Practice.
"I think what you are seeing now is a broad realization that we may be in a protracted period of low oil prices," he said, adding that the oil slump could stretch for years.
On Tuesday, Brent crude rose almost 1 percent to settle at $49.99 a barrel on the ICE Futures Europe exchange in London, after falling 5.2 percent Monday to $49.52, the lowest level since the end of January. West Texas Intermediate crude rose 1.3 percent to $45.74 a barrel Tuesday on the New York Mercantile Exchange.
Volatility in oil prices is continuing because the global market is still heavily supplied and demand remains weak.
Crude prices began falling in August 2014 as a result of abundant global supply -- largely driven by U.S. shale production. Although energy companies have cut rigs and spending in the shale formations, production remains strong. Several domestic companies added drilling rigs when prices rebounded in the spring.
Adding to the abundant supply is the decision by OPEC not to cut production levels -- a move analysts have attributed primarily to Saudi Arabia's desire to maintain market share. OPEC members Iraq and Saudi Arabia also have increased output.
The recent nuclear agreement between Iran and six nations led by the United States also raises the possibility of furthering the oil glut by adding Iranian oil to the market later this year. Initially, many traders and analysts were skeptical about how quickly Iran would be able to move its crude to the market, but the country has said it would rapidly seek to export oil again, said Michael Lynch, president of Strategic Energy and Economic Research Inc.
"I think the big thing is people are watching to see what the Saudis are going to do and the Saudis are not really in the mood to take any steps in their oil policy that will help out the Iranians," Lynch said.
Saudi Arabia and Iran are rivals in the oil market and politically in the region. They have been at odds in Yemen where Saudi Arabia earlier this year ordered airstrikes against rebels backed by Iran.
The U.S. economy is benefiting from lower oil prices, despite the hit oil companies are taking, said Rob Lutts, president and chief investment officer for Cabot Wealth Management. The energy sector makes up about 8 percent to 9 percent of the economy.
However, said Lynch, a strengthening U.S. economy has not been robust enough to drive up demand for oil as much as expected.
While energy demand in the United States is steady, the crisis in Greece last month has raised concerns about slowing demand in Europe, analysts said. A slowing Chinese economy -- China is one of the largest oil importers -- also is a concern, said Phil Flynn, an energy analyst with Price Futures Group.
"The big wild card is China," Flynn said. "How bad are things in China? We really don't know how bad the slowdown is. ... It's been a year of ups and downs. Because of that volatility the oil companies have had a hard time adjusting."
Lower oil prices have kept energy companies on the defensive this year, energy analysts said, and job cuts are being made at exploration and production companies, such as Murphy Oil and ConocoPhillips Co.
A spokesman for Murphy Oil did not return phone calls or email requests for an interview Tuesday.
Most of the layoffs earlier this year came from oil-field service companies such as Halliburton Co. and Baker Hughes Inc. Or as Ebanks said, "these guys who really survive based on the capital spent by these [oil] companies."
But oil producers are now taking a closer look at their expenses. This includes considering workforce reductions and sales of higher cost assets to strengthen portfolios and balance sheets, Ebanks said.
Further cuts in workforce and spending could be in Murphy Oil's future, analysts said. The company already has reduced its spending by about 30 percent and the number of rigs drilling in the Eagle Ford Shale in Texas.
"The rebound of oil prices [doesn't] seem to be around the corner, meaning that we wouldn't be surprised ... if we see more layoffs or capital spending cuts coming from Murphy," Luana Siegfried, an analyst with Raymond James and Associates, said in an email.
"Specifically for Murphy, in addition to the tough environment, the company had a series of unhappy dry holes over the past year and year to date, hampering its exploratory campaign," she said.
Siegfried said Murphy's recent dry holes coupled with lower prices "could possibly lead to more downsizing measures."
Murphy Oil sold its U.K. retail gasoline business and a 30 percent stake in its Malaysian oil and gas assets during the fourth quarter of 2014.
But Chief Executive Officer Roger Jenkins said last week during a call with analysts that Murphy Oil is now "reviewing the value of our midstream assets" in British Columbia, the Eagle Ford Shale in Texas, and in the Gulf of Mexico.
When asked by an analyst about 2016 capital expenditures during the call, Jenkins said the spending for next year could decline with the price environment.
"From a 2016 perspective of course that's very difficult to answer today," he said.
Business on 08/05/2015