For investors in the oil and gas sector, the first quarter of 2012 has certainly provided an interesting ride. Rising prices, crimped refining margins and historic capital spending budgets among other things marked the quarter’s highlights and have set the tone for the next period.
While slowing Chinese demand has taken some of the wind out of natural resources’ sails as of late, the energy sector promises to deliver the goods long term.
For investors, it’s important to see where we’ve been in order to know where we’re going. Here are some highlights from the oil patch’s first quarter and some potential outcomes for the second.
Mideast Troubles and Higher Prices
If there was one overarching theme for energy investors during the first quarter, it could be the tensions with Iran. Anxiety in the West about Tehran’s nuclear program continues to put pressure on Brent crude prices. Since the end of 2011, the key European benchmark has risen from around $107 a barrel to about $127 as sanctions threaten to choke off Iran’s exports. That’s just $20 short of Brent’s all time high reached in 2008.
These sanctions have certainly put a dent in world oil supply. Geneva-based oil industry consultant Petrologistics estimates that Iranian exports may have shrunk to nearly 1.9 million barrels per day in March. That’s down from about 2.2 million bpd in February. The majority of this oil flows into emerging Asia, Japan and Europe.
European sanctions stemming from last July have caused major purchasers of Iranian oil like France’s Total (NYSE:TOT) and Royal Dutch Shell (NYSE: RDS-A, RDS-B) to scale back their buying. Total is Europe’s largest refiner by volume.
While energy analysts predict that Iran won’t take military action, the odds are rising that it will. Iran’s repeated threats to close the Persian Gulf’s vital Strait of Hormuz are without doubt a cause for concern. Likewise, are Israeli threats to strike at Iran’s nuclear facilities at any time it deems appropriate. With no easy fix in sight, the continued tensions will remain a major catalyst for oil prices into the next quarter.
Woes Flow Downstream
That rising cost per barrel also had its way with refining margins. While many of the major oil and gas giants reported booming exploration and production (E&P) revenues, poor showings from their downstream refinery operations hurt earnings. With crack spreads (the price difference between crude oil and refined products) under constant pressure, the refiners, especially those on the East Coast, are seriously hurting.
Already, a gaggle of integrated firms including Marathon (NYSE:MPC), ConocoPhillips (NYSE:COP) and Sunoco (NYSE:SUN) have either decided to close their operations or spin them off in order to focus on more profitable midstream assets. With Brent remaining high for the next few months, analysts predict that more energy firms will engage in these sorts of transactions. This will definitely hit bottom lines as well as investors’ portfolios (as well as pump prices, as more gasoline refining capacity gets shuttered).