What happened
Shares of all the major oil companies are soaring in early afternoon trading Thursday -- and it's not hard to see why.
As of 12:20 p.m. EST, ExxonMobil's (XOM +3.36%) stock is up 4.6% and ConocoPhillips (COP +0.53%) is higher by 5.5%. Smaller -- but still large-cap -- EOG Resources (EOG +1.40%) is doing best of all, with a 9.5% gain.
Image source: Getty Images.
So what
Why are they up? At the most basic level, because each of these three companies produces and sells oil, and oil prices just moved sharply higher. According to the latest data from OilPrice.com, a barrel of WTI crude oil costs 5.4% more today than it did yesterday, while Brent crude (the international standard) is up 5.3%.
Two factors lie behind the sudden spike in oil prices. First, Houthi rebels in Yemen announced this morning that they successfully attacked a Saudi Aramco oil production facility in Saudi Arabia. The missile attack on the facility in Jeddah has investors worried that Saudi oil production might be interrupted by the strike -- and that more attacks may mean more disruptions, because the Houthis apparently promised that "operations [against Saudi oil facilities] will continue."
Adding to investor worries, Bloomberg reported this morning that the Organization of the Petroleum Exporting Countries (OPEC) and allied oil producers including Russia have just agreed to hold April production levels steady at their current level of 7.2 million barrels per day, rather than increasing production as had been anticipated.
Now what
Of the two stories, I think the second is the more important for investors to focus on. Currently, Saudi Arabia is operating under a "1 million barrel-a-day voluntary production cut," reports Bloomberg. This means that, even if attacks on Saudi facilities were to decrease the country's production capacity, they would have to slow production by more than 1 million barrels per day to take up all the slack that Saudi Aramco is already providing.
Simply put, attacks on Saudi Arabia can't have an effect upon oil supply unless Saudi Arabia wants them to -- and for now at least, it doesn't.
Longer-term, that could change. After all, with economies around the world starting to open up again as vaccinations against COVID-19 roll out, demand for oil is rising. The longer oil supply is held in check, in an environment of rising demand, the higher prices will rise -- and the better the news for Exxon's, Conoco's, and EOG's profits.
