Will Oil Come Down in 2013? – Chevron Corporation (CVX) and More

Since the beginning of the year the price of oil resumed its upward trend. Will this rally continue? Or will oil prices come down soon? What could explain the recent rise in oil prices? Let’s examine the recent developments in the oil market.

During February (up to date), the price of oil inched down by 0.5%; United States Oil Fund LP (ETF) (NYSEARCA:USO), by 0.3%. Despite this modest fall, since the beginning of the year prices of oil increased by 5.6%. United States Oil also rose by 6%.

The rise in the oil prices coincided with the recovery of leading oil and gas companies such as Chevron Corporation (NYSE:CVX). This company stock rose by nearly 7.5% (year-to-date). The linear correlation between the stock of Chevron and the daily changes in the price of oil reached 0.57 during 2012-2013. This correlation implies (assuming linearity and normality of figures) that the recovery of oil price could explain nearly 33% of Chevron’s stock volatility.

This relation should be taken with a grain of salt, but it does suggest that if the price of oil will continue to rise, assuming all things being equal, the value of Chevron will augment (based on DCF valuation). During 2012, this company’s revenues fell by 5%. Part of the drop in revenues is related to the decline in the price of oil during the year by 7%. If the price of oil will remain higher than in 2012, it could pressure up Chevron’s stock price. Let’s analyze the recent developments in the oil market.

During January and February, the U.S. Petroleum and oil stockpiles fell by 7.2 million barrels; it reached 1,791 million barrels by Feb. 8. The current oil stockpiles are 40.3 million barrels above the storage during the same week in 2012. The recent drop in storage suggests the oil market is tightening up. Moreover, the linear correlation between the shifts in stockpiles and oil prices is mid-strong and negative at -0.2. This relation could mean if oil stockpiles will continue to decline, oil prices may further rise.

From the supply standpoint, according the recent EIA report, the U.S oil imports fell during January and February by almost 2%; as of Feb. 8 it was also 11.5% lower than the same week in 2012.

Refinery inputs also sharply declined during the month by 5.9% and were 0.4% lower than last year. The drop in imports and refinery inputs could have contributed to the recent rally in oil prices during recent weeks. The weekly changes in imports and refinery inputs tend to be negatively correlated with oil prices. Therefore, if imports and refinery inputs will continue to fall, this could suggest oil prices will further rise.