Earnings season is upon us. The next week or so will provide a lot of insight into the extent of damage done to the bottom lines of the oil industry as the first quarter of 2015 was the first in which the oil price drop will be truly reflected in the numbers. BP (NYSE: BP) went first: its first quarter profit declined by 20% from a year ago. BP saw its replacement-cost profit (similar to net income) drop from $3.48 billion in the first quarter of 2014 down to $2.6 billion for the first quarter of this year. The decline is significant, but BP’s quarter was also twice as good as analysts had been predicting. BP’s downstream unit made a lot more money, benefitting from lower prices. BP also took advantage of the contango situation in the oil markets. With oil for delivery in the future at a higher price than today, BP’s trading arm made a lot of money by storing and trading oil. “We are continuing to progress our planned divestment programme, we are resetting our level of capital spending, and we are addressing costs through focusing on simplification and efficiency throughout BP,” Bob Dudley, BP’s CEO said in a statement.

Total (NYSE: TOT) also reported better than expected numbers. Its profit also fell by about 20%, but the French oil giant managed to produce at its highest level in a decade, which helped offset some of the declines from low prices. Total’s first quarter profit fell to $2.66 billion, down from $3.34 billion a year ago, but still above analysts’ estimates. Total had performed much worse in previous quarters as costs had risen on many of its operations around the world. But with many of its projects nearing completion and ready to start pumping, Total should find itself in a better position. Its plan to divest itself of unwanted assets, cut costs, keep spending reasonable, and boost production should all work in its favor in the quarters ahead.

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Taken together, the two earnings reports suggest that the oil majors may weather the collapse in oil prices much better than many had predicted. The integrated business model has insulated the largest companies, as downstream units can offset upstream losses. It remains to be seen how the smaller companies will perform. You can bet many won’t be quite as resilient as BP or Total.

Saudi Arabia’s oil minister Ali al-Naimi delivered a speech in Beijing on April 28, praising the large and growing relationship between Saudi Arabia and China. During his speech, he underscored the fact that oil will be the principle source of energy for many years to come and that Saudi Arabia would be its number one supplier. He also recognized China as one of the world’s most important energy consumers, and tried to impress upon his Chinese audience that Saudi Arabia would be there for China as it grows. As China’s oil demand increases, Naimi emphasized, Saudi Arabia will send more supply. China’s oil demand is indeed up – increasing about 6.5% in March from a year earlier. The effect of Naimi’s speech was complex. On the one hand, the markets saw Naimi’s pledge to boost supply as a negative for oil prices. But with China’s demand growing – not to mention the possibility of some monetary stimulus coming from Beijing – there is some room for higher prices.

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China’s two largest oil exploration companies are rumored to be the target of an industry consolidation. PetroChina and China Petroleum & Chemical Corp (Sinopec) are seeing their shares trade much higher on speculation that they might merge. The two companies have denied the rumors, both stating that they have not received any information from China’s central government about the possibility of the two companies merging into one behemoth. Meanwhile, China’s government is conducting a corruption probe into Sinopec’s second highest official. Chinese President Xi Jingping appears intent on rooting out graft within China’s state run enterprises.

Russia plans on meeting with OPEC ahead of the June meeting for the oil cartel. OPEC is set to meet in Vienna on June 5 for the first time since it decided to leave its quota unchanged last November. Prior to that November meeting, OPEC sat down with Mexico and Russia to discuss the possibility of coordinating production cuts in order to boost prices. They were unable to reach an agreement however, paving the way for elevated levels of production all around as producers fought for market share. There is no evidence thus far that Russia and OPEC will be able to settle on a coordinated policy this time around either, but the meeting is something to keep an eye on.

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Speaking of meetings, Gulf leaders are set to meet in Saudi Arabia in early May to prepare for a visit to the U.S. to meet President Barack Obama. Obama will host Gulf Cooperation Council countries on May 13 at Camp David to discuss the ongoing negotiations with Iran over its nuclear program. Obama wants to bring skeptical Gulf countries on board, hoping to build a regional coalition to support the deal. Even though the Arab states are allies of the U.S., they are also rivals of Iran and are suspicious that a rapprochement with Iran is the wisest course of action. The GCC will meet in early May to coordinate their positions.

The EIA projects that the U.S. will become a net exporter of natural gas by 2017, with levels of exports growing quickly thereafter. However, the EIA has a range of scenarios for natural gas exports that vary pretty widely depending on different assumptions. Higher domestic supplies would lower prices and lead to a much higher level of exports. The same would be true for a higher level of innovation, which would also bring down the cost of production. Similarly, high global prices would make the price differential between U.S. and the rest of the world much greater, expanding the opportunity for U.S. LNG exporters. Finally, greater demand for natural gas through pipelines to Mexico will also increase exports. PIRA Energy, a consultancy, predicts that Mexico’s energy reforms will increase natural gas flows from the U.S. to Mexico from 2 billion cubic feet per day (bcf/d) in 2014 to 5.6 bcf/d in 2020. While there is a lot of uncertainty to all of these estimates, what is clear is that the U.S. will soon be a major natural gas exporter on the global stage.

By Evan Kelly of Oilprice.com

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