The oil market is heating up. The recent developments in the Middle East and the start of driving season in the U.S may have contributed to the recent rally of oil prices. Will the oil market continue to heat up? How will the latest developments in the oil market affect leading oil companies? Let’s analyze the recent developments in the oil market.
During June and July, the price of oil increased by more than 8%. Furthermore, United States Oil (NYSEMKT: USO) also sharply rose during this time frame by a similar rate. This ETF follows the price of oil (West Texas Intermediate). This ETF’s net assets are estimated at $811 million as of July 2nd. The ETF’s main holdings include August contracts of WTI crude oil in the NYMEX and ICE markets. USO’s management expense ratio is set at 0.45%. Thus, holding this fund is a good way for investors to hedge or expose their portfolio to oil. Let’s take a closer look at the recent fundamental developments in oil market including changes in supply, demand and storage.
Supply & Middle East
Even though OPEC’s production remained stable in recent months, oil investors are still concerned by the recent developments in the Middle East most notably the protests in Egypt against the current regime. Egypt doesn’t have a strong oil base but its control of one of the most important checkpoints in the world – Suez Canal, in which nearly 3.8 million barrels per day transport through it, is keeping oil traders concerned. Keep in mind, however, during the 2011 Arab spring that also erupted in Egypt, the Suez Canal remained open. Therefore, the current developments in Egypt are less likely to affect the shipment of oil via the Suez Canal.
The International Energy Agency estimates non-OPEC countries’ oil production will rise in 2013 by 1.1 million bbl/d (year-over-year). Based on the above, the oil supply in OPEC and non-OPEC countries is likely to keep oil prices from rising.
Oil companies’ profit margins
Leading oil companies such as Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM) are likely to benefit from the recent rise in the price of oil. Not only these companies’ revenues are likely to increase, but their profit margins are also likely to pull up.
As seen in the table above, the profit margins of Chevron and Exxon Mobil were slightly lower in the first quarter of 2013 compared to the first quarter of 2012. One of the reasons for this drop in profitability was the 8% drop in oil price (year-over-year). In the second quarter of 2013, however, the price of oil is almost 1% higher than in the parallel quarter in 2012. This is likely to pull up the profit margin of Chevron and Exxon Mobil in the second quarter of 2013.
The demand for oil in the U.S is likely to pick up in the coming months as the driving season continues. Nonetheless, in the first five months of 2013 total gasoline stations sales fell by 0.9% (year-over-year), which is likely due to the low oil prices compared to the same time last year.
Nonetheless, oil companies have seen a rise in petroleum sales during the first quarter of 2013: Exxon Mobil’s petroleum sales rose from 2,473 kbd to 2,532 kbd – a 2.4% growth. The main problem oil companies are facing is the drop in oil sales in Asia/Pacific: Exxon Mobil’s petroleum sales dropped by more than 27% during the first quarter of 2013 in that region. This decline is mainly related to China. According to China’s manufacturing PMI survey for June, China’s PMI index fell to 50.1, which means China’s manufacturing sectors are still growing but at a slower pace. If China’s economy will continue to slowdown, it could reflect in a drop in oil consumption in the coming months.
For Chevron, oil sales fell not only outside the U.S but also in the U.S: net petroleum sales fell by 11.4% in the U.S during the first quarter of 2013; outside the U.S net sales dropped by 4.8%. If these trends will persist they could suggest Chevron’s revenues will continue to dwindle in the coming months.
During June, the U.S. Petroleum and oil stockpiles increased by 27.7 million barrels; it reached 1,839 million barrels by June 21st. The current crude oil stockpiles are also 41.9 million barrels higher than the storage recorded during the same week in 2012. The rise in storage suggests the oil market is loosening up, which may curb the recent rally of oil prices.
According the EIA, refinery inputs rose in recent weeks and reached 15.484 million barrels per day, which is still 0.6% below last year’s levels. The relatively low refinery input is reflected in the low numbers recorded by Chevron and Exxon Mobil in the first quarter of 2013: Exxon Mobil’s refinery input in the U.S fell by 0.8% to reach 1,810 kbd; Chevron’s refinery input tumbled down by 37.8% to 576 kbd.
The chart below shows the developments in U.S refinery input and oil price in the past year.
The recent rise in refinery input is likely to reflect in an increase in Chevron and Exxon Mobil’s inputs in the second quarter of 2013, which will pull up their respective revenues in this business segment.
The recent rally of oil may continue as long as investors are still concerns about the developments in the Middle East, but my guess is that this rally won’t last long and once the situation in the Middle East will cool down oil will fall to the low 90s. Until then, oil companies will continue to benefit from the recent rise in oil prices as their profit margins will rise.
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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.