The price of Brent, the global crude oil benchmark, recently jumped to a nine-month high of more than $115 a barrel amid growing concerns that unrest in Iraq could disrupt that nation's oil exports.
While this recent development is a reminder of just how volatile the price of oil can be, it is an anomaly, at least over the most recent five-year period. Since 2009, oil prices have been remarkably stable, with annualized volatility significantly below its long-run average of around 30%, despite major supply disruptions in key OPEC countries.
Why oil prices have been so stable
Since the Arab Spring in 2011, global oil markets have lost cumulative production of 3 million barrels per day, according to BP (NYSE:BP) chief economist Christof Ruhl. Normally, a global supply disruption of this magnitude would have caused wild swings in the price of oil.
Yet thanks to U.S. supply growth that almost perfectly offset lost OPEC production, it hasn't. According to the International Energy Agency, U.S. crude oil production rose by a record 992,000 barrels a day last year to reach nearly 7.5 million barrels a day, the highest level of output since 1989.
In fact, the U.S. accounted for nearly all of last year's non-OPEC oil production growth of 1.2 million barrels per day, according to BP's latest annual statistical review. Largely as a result, last year's volatility in the price of Brent was the lowest it has been since global oil prices were deregulated in the early 1970s, Ruhl said.
Will oil market stability continue?
Going forward, however, there are a number of risks to continued oil price stability. According to Ruhl, a sharp change in the volumes and timing of U.S. supply growth and/or supply disruptions in key oil-producing nations could lead to higher volatility.
All eyes are currently on Iraq, which supplied about 3.3 million barrels per day last month and is OPEC's second-largest oil producer. If the violence in the northern part of the country -- where insurgents belonging to the Islamic State of Iraq and the Levant, or ISIL, continue to make new territorial gains -- spreads to the south, where Iraq's major oil fields are located, meaningful volumes of production could be lost.
Though most experts don't expect this to be the case, arguing that southern Iraq is well fortified, a disruption of even a few hundred thousand barrels could have a meaningful impact on oil prices -- providing a major uplift to oil-levered companies (up to a certain point, beyond which high oil prices would threaten economic growth).
Amongst the integrated majors, Chevron (NYSE:CVX) is the most leveraged to oil, with oil accounting for a higher share of its total production and upstream revenues compared with peers such as ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS-A), which are more heavily invested in natural gas. Not surprisingly, Chevron has gained about 7% over the past month, as compared with less than 1% for Exxon and about 5% for Shell. (Shell's share price was positively affected by two major asset sale announcements last week.)
Meanwhile, in the independent exploration and production space, EOG Resources (NYSE:EOG) stands out as one of the more oil-levered names. In recent years, the company has accelerated drilling activity in areas including south Texas' Eagle Ford shale, North Dakota's Bakken shale, and west Texas' Permian Basin, which pump out much more oil than they do gas and gas liquids.
As a result, EOG's production mix is more heavily weighted toward oil than most peers. For instance, the company's typical Eagle Ford well produces 78% crude oil, 10% NGLs, and 12% dry gas. As the company further accelerates activity in the Eagle Ford and Bakken and targets 29% oil production growth this year, its production mix will become even more oil-weighted, boosting margins and returns.