During the year (so far) the price of oil rose by nearly 5%. Most of this gain was during March. Will oil prices continue to rise? How the developments in the oil market affect leading oil and gas companies? Let’s analyze the recent developments in the oil market to answer these questions.
During March (up to date), the price of oil rose by 4.66%; United States Oil (NYSEMKT: USO), by 4.2%. Despite this rise, since the beginning of the year prices of oil increased by only 4.92%. United States Oil rose by only 3.8%. The rise in the oil prices coincided with the rally of leading oil and gas companies such as Exxon Mobil (NYSE: XOM). This company’s stock increased by nearly 3.8% (year-to-date). The linear correlation between the stock of Exxon and the daily shifts in the price of oil reached 0.54 during 2012-2013. This correlation suggests (assuming linearity and normality of relation) that the rise in oil prices could explain nearly 30% of Exxon’s stock volatility. Thus, if oil prices will continue to rise, the value of Exxon will increase (based on DCF valuation).
The little movement in the price of oil during 2012 was also reflected in the company’s financial reports. During 2012, Exxon’s revenues inched down by 0.8%. On the other hand, the company’s operating profitability rose from 15.1% in 2011 to 16.3% in 2012. Moreover, the company’s diluted earnings per share rose by 15.2% to $9.7 per share. The company’s buyback program – in 2012 the company bought more than $20 billion of its stock – is also keeping the company’s stock price rising.
Let’s turn to the recent developments in the oil market.
During February and March, the U.S. Petroleum and oil stockpiles sharply declined by 23.8 million barrels; it reached 1,775 million barrels by March 15th. The current oil stockpiles are still 24.4 million barrels above the storage during the same week in 2012. The tumble in storage suggests the oil market is tightening up, which is supporting the rally in oil prices. Moreover, the linear relation between the changes in stockpiles and oil prices is mid-strong and negative at -0.2. This correlation suggests if oil stockpiles will continue to dwindle, oil prices may continue to rise.
From the supply side, OPEC hasn’t changed its policy and its production quota remained stable with minor shifts. Moreover, the oil production of non-OPEC countries slightly increased. This means the global oil supply has slightly increased, which should ease the rise in oil prices.
Based on the recent EIA report, the U.S oil imports declined during February and March by nearly 4.1%; as of March 15th it was also 13.5% lower than the same week in 2012.
Refinery inputs also declined during the past month and a half by 2%. The drop in imports and refinery inputs could have helped pressure up oil prices in recent weeks. The changes in imports and refinery inputs tend to be negatively linked with oil prices: The linear correlation between weekly shifts in oil imports and oil prices is -0.33. Therefore, if imports and refinery inputs will continue to dwindle, this could suggest oil prices will rise further.
Leading refineries companies such as Valero Energy (NYSE:VLO) and Marathon Petroleum (NYSE:MPC) have started off the year on a positive as their stocks sharply increased: shares of Valero sharply increased by 32% (year-to-date); shares of Marathon Petroleum, by 43%. The recent rally in the price of oil could partly explain these companies’ stocks spike. Both companies offer similar dividend yield: Valero Energy recently raised its dividend to $0.2 per share, which comes to an annual yield of 1.77%; Marathon Petroleum pays 0$.35 per share, which is a yearly yield of 1.55%. Both companies raised their payout in 2012 compared to 2011 but the payouts are still low: Valero Energy raised its payout from 8% in 2011 to 17% in 2012; Marathon Petroleum raised it from 7% to 12%. The stable growth in revenues for these companies is also pulling up these companies’ stock: During 2012, Valero Energy’s revenues grew by 10.5%; Marathon Petroleum’s revenues, by 4.7%. The recent upgrade Marathon Petroleum received from Moody’s following the company’s acquisition of Galveston Bay refinery may have also contributed to the rally of the company’s stock in recent days.
From the demand side, the U.S economy is showing some signs of recovery as the Philly Fed index bounced back during March, the housing market continues to rally and employment situation slowly improves. Conversely, the situation in Europe isn’t progressing and latest debacle around Cyprus is dragging down the Euro currency. The uncertainty around the future progress of Euro Area may have contributed to the decline in the oil prices in Europe.
The IEA estimates the global oil demand will increase in 2013 by a lower rate than it had previously estimated. This is another reason why global oil prices are likely to come down.
The bottom line
Based on the above, I think the price of oil in the U.S might continue to rise in the coming weeks. In the rest of the world, the price of oil might continue to slowly decline as leading economies are showing little signs of growth and the oil supply moderately rises. My guess is that the price of oil in the U.S will pass the $100 mark in the near future.
For further reading:
- Is This Oil Company Recovering?
- Will Coal Make a Comeback in 2013?
- Will Natural Gas Price Continue to Rally?
- Big Swings for Oil; where will Oil Price Land?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.