On Sunday, Sept. 15, coordinated strikes on Saudi Arabian oil facilities stripped the country of more than 5 million barrels per day of production capability, representing a 50% decrease in the amount of daily Saudi Arabian oil capacity. The following Monday was one of the craziest trading days year to date. Oil ended the day up 12.9%, and all three major stock indexes were negative due to concerns that higher oil prices could encourage a global recession. Oil proceeded to shed about half its gains the following day when Prince Abdulaziz bin Salman, the energy minister of Saudi Arabia, estimated that oil production would be restored to normal levels by the end of September.
Although investors shouldn't make investment decisions based on weekly price action, taking note of the way different companies reacted to such volatile swings in oil prices allows investors to reevaluate existing and potential holdings in line with their risk tolerance. Risk-averse investors may find themselves shocked at this weeks volatility and may want to reconsider some of their holdings, whereas investors with larger risk appetite and long-term time horizon may find many of these investments attractive and worth considering.
Drillers were the biggest winners. Patterson-UTI, Nabors Industries, and Helmerich & Payne were up 20.97%, 18.26%, and 14.33% respectively.
Upstream exploration and production companies were next. Devon Energy, Marathon Oil Corporation, ConocoPhillips, and Occidental Petroleum, were up 12.17%, 11.57%, 9.05%, and 6.01%, respectively.
Next were the oil-field services companies. Halliburton, Schlumberger, and National Oilwell Varco all rose 10.95%, 5.3%, and 2.54%, respectively.
The supermajors posted modest gains. BP was the biggest winner with a 3.99% gain. Chevron, Royal Dutch Shell, and ExxonMobil (XOM 0.82%) gained 2.16%, 1.97%, and 1.50%, respectively. Due to Exxon's size and global reach, some investors would think that Exxon would be a big winner after Monday's news. But Exxon has the largest refinery portfolio of any supermajor and the third-largest barrels per day of refinery output of all U.S. oil and gas companies, behind only Marathon Petroleum Corporation (MPC 0.31%) and Valero (VLO 1.75%).
On the losing side were refiners Valero and Marathon Petroleum Corporation, which fell 3.67% and 1.65%, respectively. Refiners tend to go down when crude oil goes up because their margins contract. On the flip side, in times of falling oil prices or extended periods of mediocre oil prices, refining stocks undergo expanding margins. Margin expansion won't occur instantly. In fact, refiners can have high margins in high crude oil prices as well as long as refined product prices keep pace. Eventually, refineries will adjust to crude prices. Refiners offer attractive shareholder value due to steady cash flows and typically high dividends.
Exercise in Futility
Sept. 16 and 17 reminded investors that even significant events can have only a short-lived effect. Oil swung as high as 15% simply on the prospect of a crippled Saudi Arabia, but retracted to only a 7% gain on even the slightest possibility that Saudi Arabia could regain production sooner than expected. Commodity traders, who depend on headlines such as these, can trade as they wish, but long-term investors should stay focused on the companies themselves.
That said, even long-term investors can't ignore the influence that oil has on oil and gas stocks, and the way that influence varies by company. Risk tolerance and years-to-retirement play a big role in investor confidence. Owning a supermajor like BP, Shell, Chevron, or ExxonMobil may not move much at all on a surge in oil prices, certainly not as much as a drilling, E&P, or oilfield services company. Refiners may even go down on a big spike in oil as we saw with Valero and Marathon Petroleum on Monday.
Understanding the value of short- and long-term trends
The news on Monday was the largest oil disruption since the Iranian revolution. Yet just one week later, we find out that the impact will be largely contained. Short-term swings can present an opportunity to add or trim a small position, but the long-term forecast of oil prices sketch the trajectory these stocks are likely to follow.
If you are looking for something other than sensational news headlines to understand trends in the energy market, the U.S. Energy Information Administration's Short-Term Energy Outlook is a good place to start. Released monthly for free, it reflects on global consumption, production, demand, and prices of oil and natural gas from the previous month, and estimates where these metrics are headed for the rest of the year.
A broader, more in-depth report worth paying attention to is the EIA's Annual Energy Outlook. Released in January and also free, the nearly 100-page Annual Energy Outlook is chock-full of rich and helpful content. There are some interesting nuggets, and historical data can be useful, but forecasts can be painfully inaccurate. The outlook should be taken with a grain of salt compared to making sure that companies can adapt, plan for the worse, and are good stewards of shareholder capital.
In sum, the news headlines will cause short-term commodity price volatility and move stocks, some more than others, but their effects are unlikely to last. A better recipe for long-term success is the following:
- Stay in tune with macro trends such as the EIA's Annual Energy Outlook.
- Carve into a prospective investment's quarterly reports.
- Engage remotely or in-person with the company's annual shareholder meeting.
Nothing can take away from the drama and historical significance of Sept. 16 where oil had the biggest one-day gain in over a decade. But separating the historical significance and what it means for the stocks themselves empowers investors to use headlines to their advantage and not allow their portfolios to simply be a product of short-term volatility.