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 Industrial Average (DJINDICES:^DJI) has soared to new record highs recently, and one of the most surprising things about this run is that the index's two energy stocks, ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), have played a big role in the rally. Given that West Texas Intermediate crude prices have fallen below $95 per barrel and are now at their lowest levels in more than four months, some investors are confused as to why Exxon and Chevron have risen, rather than plunged, in response.
A number of factors play into Exxon's and Chevron's relative success. Perhaps most important is the fact that both companies rely as much on the volume of oil and natural gas they produce as on the prices they get for selling them. Exxon pleased investors with its earnings report late last month because of its production growth, even though overall revenue actually dropped slightly. Chevron has driven its production levels upward as well, helping the oil giant boost revenue slightly in the third quarter.
Also, crude oil prices on world markets haven't fallen as far as domestic crude. Brent crude remains well above $100 per barrel, although it too is trading at its lowest levels since August -- below $105. The resulting spreads reemphasize just how much U.S. production has increased recently, as the U.S. prohibition against exporting crude oil prevents market forces from driving prices toward an equilibrium point.
Both Exxon and Chevron are integrated oil companies, so their fortunes aren't entirely tied to the price of oil. During the third quarter, narrowing spreads between Brent and WTI crude hurt margins in their respective refinery operations, as downstream profitability benefits when refineries are able to buy feedstock at discounted levels. The reemergence of the Brent-WTI spread more recently has lifted refinery stocks dramatically, and it could also help boost earnings in Exxon and Chevron's fourth-quarter reports.
Finally, you should also bear in mind is that energy-market participants have expected falling prices for a long time. Looking at WTI oil futures now, prices are expected to drop gradually in the coming years, to $85 by 2016 and $80 by 2019. As a result, even as prices have fallen over the past few months, they're nevertheless staying above the levels anticipated in coming years.
Add all these factors up, and you can understand why bullish investors haven't given up on Exxon or Chevron. If oil prices stay low in the long run, they'll eventually affect the two companies, but for now, investors haven't abandoned hope for their prospects.