Why Big Oil Lagged on the Dow's Best Day of 2013

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrials (DJINDICES: ^DJI  ) posted their best session of 2013, as lawmakers presented the framework for what could become a way forward in negotiations on the federal budget. But despite a 323-point rise in the average that sent all 30 Dow components higher, oil stocks Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) were the weakest performers in the Dow, putting in much more modest advances.

After more than a week of fear and consternation about the federal government's inability to figure out how to reopen and resolve its short-term fiscal needs, investors were ready to celebrate even the merest hint of a possible break in the Washington stalemate. They got their excuse to celebrate today, as reports came out that the House of Representatives might agree to increase the debt ceiling modestly in order to buy time for more extended negotiations about spending. Although it's unclear whether such a deal would involve ending the government shutdown, investors didn't seem to care, leading the Dow to its biggest gain since late 2011. Broader markets posted similar gains of around 2%.

But despite a rise in oil prices to approach the $103 per barrel level, the largest oil stocks didn't really participate in the rally to its fullest extent. Chevron was the weakest of the group, rising just 0.2%, as the company issued a gloomy outlook last night in advance of its upcoming third-quarter earnings release. Chevron said its upstream results would likely rise from the second quarter, as international production gains outpaced declines in U.S. production levels. But downstream results from refining and marketing operations would take a bigger earnings hit, and foreign-exchange losses were likely to put further pressure on the company's results.

Exxon did somewhat better, climbing about 1%. Yet, investors are concerned that Exxon hasn't taken the steps that some of its peers have in restructuring its operations to take maximum advantage of changing market conditions. In particular, Exxon and Chevron haven't followed the industry trend of spinning off refinery operations and midstream assets into new investment vehicles. Exxon has been good about boosting dividends and buying back shares, but production declines are an even bigger threat for it than for Chevron.

Finally, outside the Dow, BP (NYSE: BP  ) rose only 0.8% despite winning a jury trial over pollution-related injury allegations in Texas. Residents who lived near the company's Texas City refinery sued BP, claiming that it released toxic and carcinogenic chemicals into the air. But the jury ruled for BP, finding the oil company negligent, but rejecting claims that its negligence caused the injuries.

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