On Thursday, the Dow Jones Industrials (DJINDICES:^DJI) finished the holiday-shortened week with a modest loss of 16 points, as a mix of good and bad news on the earnings front held the Dow within a fairly narrow trading range. But in the energy sector, the mood was more optimistic, as rising oil prices helped lift shares of Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) higher on the day.
Why oil's moving
Oil futures closed at their highest levels since early March, with West Texas Intermediate settling above $104 per barrel. Most energy analysts pinned the move upward on two main factors: geopolitical turmoil in Ukraine, and strong economic conditions in the U.S. that could boost demand for energy. With the long holiday weekend for U.S. markets, short-term-minded traders seemed reluctant to make bearish bets on crude oil just in case tensions heat up between Russia and Ukraine.
Interestingly, though, market participants appear to be ready for potential supply disruptions that could result if outright conflict erupts in the Black Sea region. Oil inventories rose by the largest amount in more than a decade, and with the huge boost in domestic production resulting from success in shale oil plays and other unconventional production methods, supply in the domestic market should be secure for at least the immediate future.
What it means for Exxon and Chevron
The price of oil is a key factor for the two oil giants in the Dow Jones Industrials. With both ExxonMobil and Chevron having struggled to find new sources of production to keep overall volume growing, rising prices will make an essential contribution to revenue and profit growth. If prices hold above the $100 per-barrel level, then, as the chart shows, it should provide Chevron and ExxonMobil with favorable comparisons versus last year's price range in the low $90s.
Longer term, though, the real problem for the Dow Jones Industrials' energy contingent could come in the summer months. Spot prices spiked last year during the third quarter, and that will give ExxonMobil and Chevron difficult third-quarter comparisons. The resulting pressure on revenue could spook investors, who've already had to deal with the threat of lower sales due to production challenges.
The real question for Exxon, Chevron, and the Dow is whether any ease in geopolitical tension would bring oil prices crashing back down through the $100 per-barrel level. If the global economy keeps recovering, then oil might hold onto its recent gains -- and that could be even better news for energy investors and for the Dow Jones Industrials on the whole.