In the past couple of weeks the price of oil has slowly recovered from its downward trend it had during April. Will the price break the $100 in the near future? How the recent developments in the oil market affect leading oil producers? Let’s examine the recent changes in the oil market and try to determine what’s up ahead for oil.
During May (up to date), the price of oil rose by almost 3%. Moreover, since the beginning of the year price of oil increased by 4.7%. United States Oil (NYSEMKT: USO) also rallied during the month by 3%. Since the beginning of the year, United States Oil rose by 2.9%. USO follows the price of oil (West Texas Intermediate or WTI). This ETF’s net assets are roughly $821 million as of May 7th. According to the ETF’s prospectus (opens pdf) the USO’s net assets consist mainly of “investments in future contracts of sweet crude oil, other types of crude oil, diesel-heating oil, gasoline, natural gas, and other petroleum-based fuels that are traded on the NYMEX, ICE Futures Exchange or other U.S. and foreign exchanges”. More specifically, as of May 7th the ETF mostly holds June contracts of WTI crude oil in the NYMEX and ICE markets. Therefore, this is a good way of tracking the movement of crude oil price.
The recent recovery of oil price may have helped pull up leading oil stocks such as Chevron (NYSE: CVX): shares of the company rallied during May by nearly 1%. Let’s turn to examine the latest changes in the oil market.
During April, the U.S. Petroleum and oil stockpiles rose by 18.9 million barrels; it reached 1,792 million barrels by April 26th. The current crude oil stockpiles are 26.6 million barrels higher than the storage recorded during the same week last year. The rise in storage suggests the oil market is loosening up, which may pull down oil prices. Moreover, the linear correlation between the changes in stockpiles and oil prices is mid-strong and negative at -0.2. This correlation suggests if oil stockpiles will further rise, oil prices may dwindle.
From the supply side, OPEC left its production pace nearly unchanged at around 30.1 million bbl/d. Moreover, the IEA projects the oil production of non-OPEC countries will increase in 2013 by 1.1 million bbl/d (y-o-y). This means the global oil supply is expected to rise, which should ease down the price of oil.
Based on the latest EIA report, the U.S oil imports slipped during April by nearly 0.2%; as of April 26th it was 11.5% lower than the same week last year. Conversely, oil production in the U.S rose by 1.5% during last month. It was also 19.4% higher than the same week in 2012.
Refinery inputs rose during the month by 1.7%. The rise in production and refinery inputs could help pressure down oil prices in the coming weeks.
The recent rise in the price of oil may have pulled up leading oil companies such as Chevron and Royal Dutch Shell plc (NYSE: RDS-A). More specially, during the past month, share of Chevron rallied by 4.9%. In comparison, during the same timeframe the S&P500 index rose by 4.1%. Despite the recent rally in the price of oil, its average price in the first quarter of 2013 was 8.3% lower than the same quarter in 2012. The sharp fall in the price of oil in Q1 2013 may have been among the key factors for the drop in the revenues of these leading oil producers. Chevron’s revenues fell in the first quarter of 2013 by 6.4% (y-o-y). The oil production of the company declined by 1.9% as it reached 1.76 million bbl/d compared to 1.79 million bbl/d. Further, the company’s refinery input tumbled down by 18.2% in the recent quarter. The drop in refinery input was from the U.S segment that fell by 38%. The slowdown in production and refinery input pulled down the company’s revenues. If this trend will continue, Chevron’s revenues will further fall.
Shares of Royal Dutch Shell rose by 7.2% in the past month. But Shell’s revenues also declined during the past quarter by 5.9%. One of the reasons for the drop in revenues was the 7% drop in realized price of oil during the quarter (y-o-y). In terms of production, the company’s upstream oil production declined by nearly 2% (y-o-y). On the other hand, its downstream refinery input rose by 4%; Shell’s oil production slightly increased by 1% compared to the same quarter in 2012. Shell, much like Chevron, suffered from the decline in the price of oil.
From the demand side, the U.S economy is showing signs of slowdown as the manufacturing PMI slipped again to 50.7, which means the manufacturing sectors in the U.S are still growing but at a slower pace. China’s April manufacturing PMI also declined to 50.6. If these leading countries’ manufacturing sectors’ growth will keep slowing down, this could indicate a slowdown in growth for oil consumption. Further, based on the recent IEA report, the global demand in the first quarter of 2013 was lower than expected. If this trend will continue, oil prices may come down.
The Bottom Line
Based on the above, my guess is that the price of oil will slowly decline in the near future. This will lead to lower profit margins and no revenues growth for leading oil producers.
For further reading:
- Is This Oil Company Recovering?
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- Big Swings for Oil; where will Oil Price Land?
- Why Caterpillar isn’t pulling up? Just Blame it on Oil
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