Oil prices cooled in the month of May as weak economic news from Europe and China took its toll on the demand outlook. Oil prices have fallen by as much as 13% since the beginning of the month and prices are expected to fall further if the Eurozone crisis worsens. Low oil prices can have a negative impact on Exxon Mobil‘s (NYSE:XOM) quarterly earnings, which are already under pressure because of weak gas prices in the U.S. and falling production volumes. Oil prices are a major driver of the earnings for oil majors like Exxon Mobil and Chevron (NYSE:CVX). Over the past few quarters, high oil prices have helped companies override the fall in production levels. A drop in prices could result in a significant drop in the upstream earnings for Exxon and other oil producers.
We have a $94.12 price estimate for Exxon Mobil, which is at a 15% premium to its current market price.
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Oil prices have fallen over the past few weeks as negative news from Europe and China have raised concerns over the pace of the global economic recovery. Some reports have mentioned that the U.S. government will seek to coordinate a release of reserves held by the G8 countries to keep prices in check in the month of July, when the EU will stop accepting crude from Iran. Prices have also been contained because producers like Saudi Arabia have increased supply to international markets. Oil prices stayed above $100 for most of last year and in the first half of 2012 because of tensions in the Middle East.
Lower oil prices could have an impact on the Q2 earnings of Exxon Mobil. Last quarter, the company reported a 11% decline in earnings over the same period last year. Q1 earnings were impacted by a 5% decline in production levels.
Exxon has already been hit by low natural gas prices n the U.S. and is taking steps to reduce the number of rigs drilling for unconventional resources. Our estimate for the average price per barrel for Exxon projects a moderate rise in oil prices over the next few years and is a major driver for our price estimate for the stock.
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