Is Exxon Due for a Rally?
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The recent weakness of the U.S stock market which is reflected in the low growth of the S&P500 index might be among the key factors to pull down Exxon Mobil Corporation (NYSE: XOM). The upcoming publication of the financial reports of the company might shed some light on the recent growth of the company, but even if the company will meet expectations, without a rally in the U.S stock markets, Exxon stock might not go anywhere. Don’t be discouraged by this, I still guess Exxon will resume its rally. Let’s examine what could bring Exxon back up.
S&P500 and Exxon
The weakness of the S&P500 reflects the low growth of the U.S economy and perhaps even the speculation of many that the FOMC might introduce another QE program in the near future. During the past couple of months the linear correlation between Exxon and the S&P500 reached nearly 0.83. During the year so far the correlation was 0.72 which means that the S&P500 index could explain nearly 52% of the company’s stock volatility (assuming linearity and normality). The chart below shows the movements of Exxon stock and the S&P500 during the year so far.
This also means that if the S&P500 won’t start to pick up, the stock price of Exxon might not rally.
Oil and Exxon
The slow growth in oil prices and by extension United States Oil (NYSEMKT:USO) may have also contributed to the development in Exxon’s stock. During June and July the linear correlation between the two reached 0.53. Since the beginning of the year oil prices fell by 16.5% and United States Oil by 21.3%. If oil prices will change direction and start to rise again especially if the supply will pose concerns (e.g. Iran) then this shift could also help rally Exxon.
NG and Exxon
Despite the recent rally of natural gas prices and United States Natural Gas (NYSEMKT: UNG) during the past month, the prices are still very low for the season and even in historic terms. The rise in natural gas prices might continue if natural gas storage will continue to fill up at a slower than normal pace. But as long as natural gas prices remain low in historic terms, it won’t do much good for energy companies including Exxon. Despite the relationship between Exxon and natural gas, the correlation between the stock and the NG price is very low at 0.1 (during 2012). Therefore, the movement of natural gas rates has little effect on Exxon.
Exxon's Micro View
There are some reports illustrating that Exxon might show some growth in its profitability in the near future: there is a report that Exxon might sell its German gas station operations which is estimated to be worth nearly $1.3 billion. Since Exxon presented a mere 1.3% (2011 reports) profit margin for refining and selling motor fuels operations, if the company will eventually sell its German gas station operation this could suggest Exxon will raise its profitability. On the other hand, the pullout of Exxon from exploring Poland’s shale gas didn’t seem to affect the company’s stock because the potential of these explorations was very unclear.
The upcoming publication of the financial reports for Q2 will present if the decline in oil prices during the past several months has had an adverse effect on the company’s results. Therefore, besides the developments in the U.S stock markets and the financial reports of the company, if oil prices will change direction and rally it could also cause Exxon’s stock to resume its rally.
This article on Exxon and Market Review was first published on Trading NRG
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