Exxon Mobil Corporation (XOM), Chevron Corporation (CVX): Structurally Unsound Investments

The company reported a $5 billion year-over-year decline in revenue for the second quarter. The reported decline in revenue was partially offset by reduced expenses. The reduction in expenses was not enough to offset long-term fixed costs, and, as a result, the company reported a 25.58% year-over-year decline in net income. The company’s earnings per share came in at $2.80 for the quarter.

Analysts were expecting the company to report earnings of $2.96 per share for the second quarter. Chevron Corporation (NYSE:CVX) missed analyst expectations by 5.4%.

Oil price outlook


Source: EIA

I think that the price of crude oil will eventually decline. Suppliers of crude oil may eventually ramp up production based on the time frame for extracting crude oil resources from newly discovered oil reserves in the United States. The price of crude oil should also decline due to improvements in fuel efficiency. In summary, investors should avoid investing into crude oil based ETFs like the United States Oil Fund LP (ETF) (NYSEMKT:USO).

Source: YCharts

The United States Oil Fund LP (ETF) (NYSEMKT:USO) seems overbought. The price of the ETF has improved 14.35% within the past year. I think that the price of oil has gone up temporarily. Given enough time, I think that the oil companies will start to accept lower prices on crude oil in order to generate more volume from idle production capacity.

Some have been able to benefit

ConocoPhillips (NYSE:COP) grew earnings 15% on a year-over-year basis. The growth in earnings came from increased production.

When one oil company increases production (ConocoPhillips (NYSE:COP)), other crude oil developers will also increase production (OPEC). When commodity markets become over supplied, the price of the commodity declines precipitously.

I’m not going to read too much into the positive results of ConocoPhillips (NYSE:COP) because given enough time, I think that global demand will be affected by improving fuel efficiency standards, paired with the higher rate of discoveries from alternative fuel sources like tar sands and offshore drilling.

Conclusion

The weakness in crude oil is structural. Demand for crude oil has declined and is below the five-year average. The decline in demand came from improving fuel efficiency standards. Certain oil producers will ramp-up production even as other oil producing groups will decide not to. The interest of the various oil producers will be fragmented. But given enough time, I think that the market for crude oil will become oversupplied as the greed from independent oil operators will get ahead of the interests of the whole group.

As a result, my outlook on the crude oil industry is negative.

The article ExxonMobil and Chevron: Structurally Unsound Investments originally appeared on Fool.com and is written by Alexander Cho.

Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Chevron. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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