Yesterday, the energy sector gained 1.69%, as money flowed into ExxonMobil (NYSE:XOM), up 2.63%; ConocoPhillips (NYSE:COP), up 3.07%, Transocean (NYSE:RIG), up 3.21%; and Apache (NYSE:APA), up 6.04%. Other big gainers were oilfield services companies, with OMNI (NASDAQ:OMNI) up 11.52% and Newpark (NYSE:NR) setting a new 52-week high.
Refiners fared worse, with Western Refining (NYSE:WNR) off 11.22% for the day and Alon (NYSE:ALJ) off 6.53%. In light of last Friday’s huge jump in crude oil, this all makes some sense. The oil majors and the E&P companies are getting their reserves factored in at the new prices. New exploration and drilling is bumping up the services companies. Refiners, who can’t raise prices fast enough to offset the costs of crude, are falling.
Many analysts think last week’s spike in crude prices was the result ofshort covering, abetted by the strengthening dollar. That may accountfor the uptick in companies with E&P plays, but what about servicescompanies? Yesterday’s surge indicates that traders are pricing newoperations into the companies’ stocks. But, if demand for crude isdropping, and according to the IEA, the latest projections for the restof 2008 indicate a global drop of 70,000 b/d, then it iscounter-intuitive that drilling will increase.
The oil majors and the E&P companies do not have to pump the oil.In fact, the longer it stays in the ground, the more valuable itbecomes. That is not good for the services companies. As for therefiners, as demand for gasoline drops, they manage their crudeinventory more carefully. That’s why the EIA reported lower demand forgasoline last week, even as crude inventories declined. Refiners aren’tbuying as much as prices stay above about $120 because they can’tcharge enough for the finished product to make a profit. They will onlyreplenish inventory when absolutely necessary.
The current calls for opening up the US outer continental shelf andother protected areas for exploration are just noise. There is nothingin any of those proposals that will have any short-term impact on crudeprices. The long-term impact won’t accomplish anything more than toreplace old supply with new–a costly zero-sum game.
Lower consumption, brought on by higher prices, will reduce (or evendestroy) demand. One way to hurry this along is through seriousconservation. For some reason, no politician appears interested inreducing highway speed limits, which could save as much as 10%-20% ofUS gasoline consumption. Sooner or later conservation will enter thediscussion because nothing else has any significant short-term impact.Sooner would be better.
Paul Ausick
June 10, 2008
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