When will it end?

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Downstream units have suffered at the hands of a commodity super-cycle. Relief is in sight though, as prices have withdrawn.

Predictions that oil would not sustain its record price levels were proved wholly wrong as second quarter results revealed disappointing figures for downstream units worldwide.

The growing feedstock price dilemma has reared its ugly head again this month, after a series of poor performances in the second quarter of 2008 were reported by some of the industry's big players.

Companies such as Chevron, ExxonMobil, Marathon, Tesoro and Imperial have all reported refinery earnings declining in the first two quarters of 2008, put down to the high feedstock prices experienced so far this year.

Last month, the market saw oil prices soar to an incredible US $147 a barrel - a leap put down to tensions over crude producers in Iran and Nigeria. Although prices have since fallen recently to a seven week low of $122 a barrel, the detrimental impact of escalating feedstock prices has hit the refining and wholesale sectors hard.

Chevron has just reported a downstream loss of $52 million for the second quarter of 2008, compared to an income of $517 million for the corresponding period in 2007. The US downstream loss was a staggering $682 million, compared with income of $781 million in the year-ago period.

"The higher cost of crude oil used in the refining process was not fully recovered in the price of gasoline and other refined products. As a result, our downstream operations incurred a loss in the second quarter, with most of the loss taking place in the United States," explained Chevron CEO, Dave O'Reilly. According to O'Reilly, effects of planned refinery downtime also contributed to the U.S. loss in the period.

Marathon Oil has also released large losses, with downstream earnings of $1,558 million down $1,835 million from the second quarter of 2007, driven by significantly lower worldwide refining margins.

"The second quarter 2008 was a challenging quarter financially, particularly as a result of the significantly lower refining and wholesale marketing realised margins in a very difficult downstream environment," said Clarence Cazalot Jr, Marathon president and CEO.

Things may start to look brighter, however, as industry experts are predicting that the price of crude oil will stabilise and then fall over the next year and a half.

The World Bank recently announced in its Global Economic Prospects 2008 report that oil prices will fall gradually through 2009 to about $75, and then drop to as low as $50 in the longer-term, thanks to a combination of supply side factors.

The bank said that because OPEC has limited spare capacity and is holding down production, oil prices will likely remain quite elevated and volatile.

However, high prices and increasing environmental concerns should continue to moderate growth in demand. Whether this will spark the level of price drop predicted is yet to be seen.

Merril Lynch recently amended its 2008 WTI oil price forecast by $13 to $115 per barrel, and 2009 forecast by $17 to $107 per barrel. In a separate note, the brokerage said it is raising its 2008 Brent oil price forecast by $14 to $114 per barrel and 2009 forecast by $17 to $106 per barrel.

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