Key earnings reports are expected from the oil sector this week.

Exxon Mobil (XOM:NYSE) will report this Thursday, while Chevron's (CVX:NYSE) will come in on Friday. Both expect earnings to be less than the same quarter last year.

While inherently bearish, this news should be treated like a “drop” in demand for crude oil.

When world demand outlook is revised down, that doesn't mean demand is dropping… it just means it isn't rising by as much. For example, on Jan. 18, 2007, the International Energy Agency cut its demand growth outlook for 2007 from 1.43 million barrels a day to 1.39 million barrels a day.

Even though this represents a 16% decline, the key phrase here is “demand growth.”

World demand stood at an estimated 84.38 million barrels a day in 2006. Demand for 2007 is expected to be 85.77 million barrels a day -- an increase of 1.65% over 2006 demand.

We need to apply this same idea to these earnings reports coming out at the end of the week.

Exxon Mobil forecasts its earnings to be $1.51 per share, down 9% from the same quarter one year ago. Chevron expects to have earnings of 1.73%, a decline of 7% from the year-ago quarter.

The key phrase in this? “Earnings.” These aren't losses. These companies are still very profitable.

Exxon Mobil is going to pull in an estimated $100 billion in revenue, and Chevron should ring in at $68.6 billion.

With oil at nearly $80 a barrel, it was easy for these household names to rake in the cash. In fact, Exxon Mobil had the most profitable year in corporate history in 2005. It expects to beat those numbers in 2006.

Now, since oil had a sharp fall through the fourth quarter, it's highly unrealistic to expect these companies to pull in just as much earnings as when oil was $15 higher.

To be sure, these “bearish” earnings announcements could have a short-term negative impact on the companies' stock prices, but look how ConocoPhillips (COP:NYSE) has handled its “drop” in earnings.

ConocoPhillips' earnings clocked in 13% less than the previous year's same quarter on Wednesday, Jan. 24, 2007. The stock closed at $65.62 that day.

The next day, prices dropped to $64.06, a decline of 2.4%. But Friday's price reclaimed about half of that loss, and ConocoPhillips closed out the week at $64.77.

I think now that oil has found some support you should see that these lower earnings for Exxon Mobil and Chevron will have a similarly benign effect on share prices.