Will Oil Reach New Low By the End of 2012
Friday, November 9, 2012
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The price of oil zigzagged in the last few days on account of the high uncertainty in the markets with respect the U.S Presidential elections. Now that the elections are over, oil traders could focus on the fundamental changes in the oil market and the potential ramifications to the U.S economy under the incumbent President Obama in the next four years. Let’s examine the recent developments in the oil market, review the potential effect of the changes in the price of oil on oil companies, and figure whether the price of oil could further decline during the rest of year.
During November (up to date), the price of oil declined by 2.1%; United States Oil (NYSEMKT: USO), by 1.8%. Despite the recent fall in the price of oil, it is has still increased by a larger margin than other assets have during the year. In the chart below are the normalized (as of January, 3rd 2012) prices of natural gas, oil and S&P500 index.
On a quarterly basis, the price of oil declined in the past couple of quarters. This fall had different effects on the major oil companies. The chart below presents the operating profitability of leading oil companies against the quarterly oil price.
During the third quarter the operating profitability of Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) declined. On the other hand, the operating profitability of Royal Dutch Shell (NYSE:RDS.A) rose during the recent quarter compared to the second quarter. This analysis is of course very crude and doesn’t consider the changes in each company’s operations; nonetheless it does show that at face value the price of oil didn’t seem to have a strong effect on these companies’ profit margins. Let’s examine what has changes in the fundamentals in the oil market.
Storage
Last week, the U.S. Petroleum and oil stockpiles rose by 0.7 million barrels; it reached 1,793 million barrels. The current oil stockpiles are 48.6 million barrels above the levels were during the same last year. The current high level of oil suggests the oil market is looser this year compared to last year. Moreover if this stock build up will continue, which I suspect it will, this could further loosen the oil market. The linear correlation between the changes in stockpiles and oil prices is mid-strong and negative, which mean that if oil stockpiles will further rise, it could suggest that oil prices aren’t likely to rally.
From the supply side, according the recent EIA report, the U.S oil production continues to increase, as the average production rose last week by 0.3% (week over week) and by 13.4% compared to the same week last year. Refinery inputs edged down by 0.1% but remained 1.8% higher than last year. If the U.S supply will continue to expand in the weeks to follow it could further pull down the price of oil during the rest of the year. The chart below presents the recent shifts in the four week average oil production and the weekly average rate of oil during 2011-2012. The recent rise in the oil production coincided with the tumble in oil prices.
The price of oil zigzagged in the last few days on account of the high uncertainty in the markets with respect the U.S Presidential elections. Now that the elections are over, oil traders could focus on the fundamental changes in the oil market and the potential ramifications to the U.S economy under the incumbent President Obama in the next four years. Let’s examine the recent developments in the oil market, review the potential effect of the changes in the price of oil on oil companies, and figure whether the price of oil could further decline during the rest of year.
During November (up to date), the price of oil declined by 2.1%; United States Oil (NYSEMKT: USO), by 1.8%. Despite the recent fall in the price of oil, it is has still increased by a larger margin than other assets have during the year. In the chart below are the normalized (as of January, 3rd 2012) prices of natural gas, oil and S&P500 index.
On a quarterly basis, the price of oil declined in the past couple of quarters. This fall had different effects on the major oil companies. The chart below presents the operating profitability of leading oil companies against the quarterly oil price.
During the third quarter the operating profitability of Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) declined. On the other hand, the operating profitability of Royal Dutch Shell (NYSE:RDS.A) rose during the recent quarter compared to the second quarter. This analysis is of course very crude and doesn’t consider the changes in each company’s operations; nonetheless it does show that at face value the price of oil didn’t seem to have a strong effect on these companies’ profit margins. Let’s examine what has changes in the fundamentals in the oil market.
Storage
Last week, the U.S. Petroleum and oil stockpiles rose by 0.7 million barrels; it reached 1,793 million barrels. The current oil stockpiles are 48.6 million barrels above the levels were during the same last year. The current high level of oil suggests the oil market is looser this year compared to last year. Moreover if this stock build up will continue, which I suspect it will, this could further loosen the oil market. The linear correlation between the changes in stockpiles and oil prices is mid-strong and negative, which mean that if oil stockpiles will further rise, it could suggest that oil prices aren’t likely to rally.
From the supply side, according the recent EIA report, the U.S oil production continues to increase, as the average production rose last week by 0.3% (week over week) and by 13.4% compared to the same week last year. Refinery inputs edged down by 0.1% but remained 1.8% higher than last year. If the U.S supply will continue to expand in the weeks to follow it could further pull down the price of oil during the rest of the year. The chart below presents the recent shifts in the four week average oil production and the weekly average rate of oil during 2011-2012. The recent rise in the oil production coincided with the tumble in oil prices.
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