Companies most affected by oil prices

Crude oil prices rose again at the end of 2018, which is unwelcome news for consumers who find that car refueling costs are higher. If this growth continues to have an impact on many industries that rely on oil as an input (such as transportation, consumer goods manufacturers, and the food industry), it’s worth watching.

In September 2018, the average price of Brent crude oil was US$79 per barrel, an increase of US$6 per barrel from August. The U.S. Energy Information Administration’s short-term forecast predicts that the average price per barrel will rise from $74 in 2018 to $75 in 2019. This is not a drastic change, but it may indicate that cheap prices in recent years are going down. end.

Rising oil prices are good news for certain industries. Obviously, they are beneficial to oil companies, and both positive and negative effects will spread to other parts of the economy.

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As the price of oil fell from more than US$120 per barrel to the US$45-55 range, the stock prices of oil producers and companies that support the energy industry fell sharply. If oil prices continue to rise, it is certain that they will rise in 2019.

Oil company

The obvious link between oil prices and profitability is most pronounced among companies directly involved in the oil industry. The petroleum sector has multiple aspects, including petroleum exploration, drilling, refining, and distribution to consumers.

These industries can be divided into two categories: upstream companies and downstream companies. Upstream companies are directly involved in the exploration and production of crude oil. Their job is to locate and test potential drilling sites, and then build oil extraction facilities. Downstream companies refine and distribute finished products, including gasoline and diesel. (For more information, see: The difference between oil service and refinery.)

When oil prices fall, upstream companies are hit hardest because the price at which they sell oil is determined by the market, but their production costs are largely fixed. If the cost of producing a barrel of oil is higher than the price on the market, the producer will suffer losses and eventually go bankrupt. Large, expensive, and capital-intensive drilling operations have been hit harder than smaller, more flexible drilling rigs. Drilling rigs can be temporarily shut down and restarted as soon as the price rises. Downstream companies will not be hit so severely because they make a profit by buying crude oil and selling refined oil at high prices. Even if oil prices fluctuate, their profit margins should remain fairly stable.

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Today, most large oil companies have large upstream and downstream businesses and are called comprehensive oil companies. The stock prices of these companies fell due to their involvement in upstream businesses. The stock prices of pure upstream companies with no downstream components fell further. Pure downstream companies that are completely focused on refining and selling finished products have made profits during this period of low oil prices.

The following table shows the six-month changes in the stock prices of some large comprehensive pure-business companies during the oil price decline:

Synthetic oil

Pure upstream

Pure play downstream

Exxon Mobil (XOM) -8.2%

Transoceanic (Actual) -53.4%

Valero (VLO) +6.01%

Chevron (CVX) -13.63%

Offshore diamond (Do) -28.00%

Tesoro (TSO) +36.21%

British Petroleum (BP) -12.21%

Patterson-UTI Energy (PTEN) -47.02%

Phillips 66 (PSX) -8.56%

Total SA (TOT) -17.08%

Nabos Industries (Nitrile rubber) -52.38%

Marathon oil (MPC) +14.55%

Phillips 66 (PSX) -8.57%

Anadarko Petroleum (APC) -23.58%

Aaron American Energy (ALG) -8.08%

Source: Reuters, data as of 2/9/2015

Industrial Company

Oil companies are not the only ones feeling the pain of low oil prices. Manufacturers and industrial companies are also feeling the pressure as the industry is responsible for providing materials to build and expand oil drilling operations. At the end of 2015, oil producers did not undertake new projects, but reduced production. Manufacturers of steel, machinery and machine parts, and heavy equipment have all been affected by the economic downturn.

U.S. Steel Corporation (X) and ArcelorMittal (MT), the share prices of the world’s two largest steel producers fell by approximately 30% in the six months from September 2014 to February 2015. caterpillar The CAT supply of heavy bulldozers and other industrial vehicles to the oil industry fell by 18% during the same period. Halliburton (HAL), a diversified company specializing in oilfield services that supports the energy industry, fell 36.31%. Another company in the petroleum services industry, Schlumberger (SLB), down nearly 21%.

Finance company

When oil prices are high, we will see a large amount of new capital investment used to extract oil, and when oil is cheap, these investments are considered too expensive. A classic example is the shale oil boom in the early 2000s, which elevated the United States to a net oil exporter. The production cost of shale oil is higher. When prices fell, many new drilling operators were forced to lay off staff and reduce production. Some even filed for bankruptcy protection. Holders of bonds issued by the industry have suffered losses due to the downgrade of the debt.

The largest financial sector players in the United States have diversified and hedged their loans to the energy sector. Certain smaller financial companies are particularly affected. Regional banks in oil-producing regions are most likely to be harmed first. Bank of Nova Scotia of Canada (BNS) fell 19.12% in the months to February 2014, funding some oil sands mining operations. Bank of Texas Karen/Frost Banker (CFR) fell by more than 10% during the same period because nearly 12% of its loan portfolio was in the energy sector. Texas Capital Bank (TCBI) fell more than 7%.

Bottom line

The impact of oil prices on companies in many industries extends far beyond the petroleum industry. The recent increase in crude oil prices has been modest, and the impact on consumers as of the end of 2018 was not serious. But wise investors pay close attention to the rise and fall of crude oil prices. Their fluctuations have a knock-on effect on the entire American economy.

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