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Oil has had quite a week. Brent Crude prices are up more than 8% from Tuesday’s lows of $61/barrel to trade north of $65.5. And there are a handful of reasons why.
Firstly, European Central Bank (ECB) President Mario Draghi pretty much reiterated his “whatever it takes” mantra. Investors digested this as implying more monetary stimulus on the way to support/foster Eurozone growth.
Secondly the US Federal Reserve offered a more dovish assessment of the outlook. This supported hopes that its 2015-18 hiking cycle is over, if not having to be reversed, to support the US economy.
Rhetoric from the duo (and hopes that China will also do more) gave risk appetite a welcome boost which tends to help oil. The assumption is for lower rates/cheaper money for longer, to support global growth. This would fuel (pun entirely intended) demand for the raw material to produce the the energy required to make and do more.
However, that wasn’t all. Iran shooting down a US drone heightened Middle Eastern geopolitical tensions, hot on the heels of last week’s tanker attacks. This stoked disruption fears for a key supply route which could squeeze prices higher.
Lower US stockpiles and a Philadelphia refinery explosion have also added their tuppence on the supply restriction front.
Oil has thus had the best of both worlds: Hopes of more demand and fears of lower supply.
But what was most interesting this week was divergent performance among FTSE Oil names.
BP and Shell have posted perfectly acceptable gains of 3.6% and 4.1% this week, respectively. This easily beats the FTSE100 Index which is – surprisingly – only 1.1% better off since last Friday’s close.
More impressive, however, are Cairn (+16%), Tullow Oil (+10.5%) and Premier Oil (+10.2%). And don’t forget Petrofac +6.7%, Hunting +10.7% and Wood Group +8.4%.
This highlights that, while the oil majors (BP, Shell) are sensitive to the oil price, their exposure to both Upstream (E&P; Exploration and Production) and Downstream (Refining, Supply, Sale) activities they are not as sensitive as their smaller sector cousins. It also shows how Oil services (exploration helpers) neatly occupy the middle ground for share price performance.
Those at the drilling end are now extracting something worth more. This makes the value of their current and future projects worth more, which means investors value the company and its shares more highly. Those helping them can charge more for future projects, so their shares are also valued more highly.
Those with big refining operations, however, now have to pay more for the “crude” product. They can only maintain profit margins if they can pass on the cost via higher prices for their refined product. That or cut costs. So while they do benefit, From having some E&P activities, the perceived benefit for bigger operators is less pronounced.
So next time you get excited about an oil price rise, either watching it happen, or predicting a big move, remember which names have a tendency to benefit, and to what extent. Explorers, Helpers or Refiners?
Remember, not all oil companies are equal. Not by a long shot.
Whichever oil names you trade, be it high or lower beta versus the oil price, get access to our research Gold Pass to see which names feature among our daily Ranges, Breakouts and/or Bounces, or which is scheduled to report Results.
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As always, enjoy your weekend.
Mike van Dulken, Head of Research, 21 June 2019
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.Prepared by Michael van Dulken, Head of Research