Big Swings for Oil

By Lior Cohen - July 10, 2012 | Tickers: CVX, XOM, USO | 0 Comments

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The oil market heated up in the past couple of weeks; after oil's price had tumbled down during most of May and June, on the last day of June oil prices took a sharp turn and hiked. Since then there were big swings for oil rates. During the last week of June the price of WTI oil and by extension United States Oil (NYSEMKT:USO) rose 6.5% and 5.7% respectively. The recent agreement among EU leaders that will tighten the supervision on EU banks and at the same time bail them out with the EU rescue fund contributed to the recovery of many commodities rates on the last day of June. Oil prices continue to swing from gains to losses with an unclear trend since then. Will the recent rally in oil price hold up or will it be short lived? 

The high volatility prices of oil didn't seem to affect (for now) many oil companies such as  Chevron Corporation (NYSE: CVX) and Exxon Mobil Corporation (NYSE: XOM). Nonetheless , if these high swings in oil price will continue, it could also raise the volatility of these companies' stock prices. During June these energy companies hiked: Exxon by 8.8% and Chevron by 7.3%. Despite the strong correlations among these companies and oil prices (during 2012 the linear correlation between oil and Exxon reached 0.53 and between oil and Chevron was 0.59), their rally  was mostly driven by the rise in the S&P500 (during June 2012 the linear correlation between S&P500 and Exxon reached 0.887 and  between S&P500 and Chevron was 0.882). 

During July Chevron and Exxon didn't perform well as their stocks prices declined by 1% and 2.2%, respectively. The recent strike in Norway had ended before it could threaten the oil production in one of Europe's largest oil producers. This news may have adversely affected the stock prices of these energy companies as this news brought oil prices down.  

The chart below shows the price of WTI and Brent during recent months. It shows the downward trend of oil prices in recent months and their recent comeback.  

Demand

This is likely to be among the key factors in keeping oil prices from rising. The concerns for an economic slow down in Europe and U.S and China–the leading economies in importing oil are likely to pressure down oil prices. The recent news of the IMF lowering the growth rate of the U.S economy in 2012 could adversely affect oil rates. Further, several U.S reports such as the Philly Fed index and U.S Manufacturing PMI also point out that the U.S economy is slowing down. Alternatively, if the Fed will intrude another quantitative easing plan in 2012, it could pressure up, at least for the short term, the price of oil.    

Supply

From the Supply side during last week the U.S oil production edged up by 0.1% compared to the previous week and was 11.4% above the production level in 2011. Imports also edged up during last week by 0.2%; they were also 3.9% above the levels in 2011.  The refinery inputs also rose on both counts (compared to last week and last year). This means the supply is still robust and may keep the U.S oil market loose. On the other hand there are some concerns for the decline in the capacity of oil refinery mainly after the shut down of two refineries in Pennsylvania.  From the Middle East there are also concerns that Saudi Arabia will lower its oil production in order to meet with the agreed upon OPEC quota.

Storage

U.S. Petroleum and oil stockpiles rose by 2.5 million barrels to 1,798.1 million barrels. The current oil stockpiles are 6.5 million barrels above oil stockpiles levels of the parallel week during 2011. This means the storage levels are close to last year’s quota even though the current price is nearly $12 lower than the parallel time last year. This could mean if the oil market will tighten as we are entering the driving season, oil prices might start to rise. 

The Euro/USD and Oil Prices

The EURO/USD changed direction and rose last week by 0.76% mainly on account of the sharp gain on June 29^th. Furthermore, the AUD/USD also increased by 1.73%. There is still a positive relationship among these exchange rates (EURO/USD, AUD/USD) and oil prices. The current linear correlation between EURO/USD and oil's price was 0.689 (in the past month). This means that if the USD will continue to depreciate against the Euro this may further pull up oil prices.

There are several points that could result in oil prices rising to the low 90s especially if the oil market will get tighter due to supply constraints. But I speculate this rally won’t last long. The ongoing concerns regarding a slowdown in the U.S and China may curb the oil market from heating up. This means in the weeks to follow we might continue seeing a further rise in not only USO, but also other leading energy companies (assuming all things equal).

This analysis on oil prices was first published on Trading NRG

For further reading: Crude Oil Prices – Weekly Outlook July 9-13

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