There’s simply an oversupply of oil right now, and too much supply causes prices fall – They’re currently near five-year lows. And when prices fall, oil companies have to cut back.
ConocoPhillips says it plans to cut spending 20 percent next year, and will slow activity in U.S. shale oil and gas exploration. BP is expected to announce layoffs Wednesday.
The low prices have come as a shock to many in the industry, says Jeffrey Grossman, president of BRG Brokerage.
“They were hoping for a big next year or two,” he says. “Now suddenly it’s, ‘Uh oh, if this price doesn’t go up, I’m spending $75 to pull something up that I can only get $65.’ That’s not a trade you want to make.”
With prices this low, Torbjørn Kjus, chief oil analyst at Norway’s DNB Markets, says companies have a few options. He expects more companies will announce job cuts, slash spending and delay investments in new projects.
“Some of them will also probably borrow more money,” he says. “Some also might even touch the dividends, but that will be seen as very negative by the investors and the shareowners.”
Kjus says because dividend cuts often hurt companies’ stock price, oil executives often view them as a last resort.