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 Fund LP (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 Corporation (NYSE:XOM). This company’s stock increased by nearly 3.8% (year-to-date). The linear correlation between the stock of Exxon Mobil Corporation (NYSE:XOM) 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 Mobil Corporation (NYSE:XOM) 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 15. 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 15 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.