Not All Energy Stocks Fall in Conjunction With Oil Prices

Energy stocks and oil prices have been on a volatile roller-coaster ride for the past few months

The energy sector has been on a volatile roller-coaster ride for the past few months. Oil prices rebounded when the Organization of Petroleum Exporting Countries (OPEC) announced last November that it was going to cap oil-production, then collapsed when the Energy Information Administration (EIA) announced larger-than-expected crude-oil inventory builds.

Prices rose again on the rumor that OPEC was going to extend its production caps to the end of March 2018 and then fell once more after OPEC confirmed the extension.

Fig. 1 — Daily Chart of Crude Oil

With oil prices collapsing once again, some energy stocks are dropping lower while other energy stocks are climbing. It all depends on which industry group those energy stocks are in.

Let’s take a look at the performance of energy stocks in the following two industry groups:

  • Oil & Gas Drilling & Exploration
  • Oil & Gas Refining & Marketing

Oil & Gas Drilling & Exploration

The Oil & Gas Drilling & Exploration industry group has been especially hard hit, as oil prices have failed to rise high enough to justify much new oil exploration, given that so many existing wells are still sitting fallow.

After brief rallies in the aftermath of OPEC’s late November announcement, we’ve seen SeaDrill Ltd (NYSE:SDRL), Transocean LTD (NYSE:RIG) and Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) resume their long-term downtrends and fall to new lows (see Fig. 2, Fig. 3 and Fig. 4).

Fig. 2 — Daily Chart of SeaDrill Limited (SDRL)

Fig. 3 — Daily Chart of Transocean (RIG)

Fig. 4 — Daily Chart of Petroleo Brasileiro (PBR)

It’s tough to make money when it’s cheaper to bring old wells back online than drill new ones.

Oil & Gas Refining & Marketing

On the other hand, the Oil & Gas Refining & Marketing industry group has been doing quite well for the past few months thanks to the widening “crack spread.”

The crack spread is the price difference between the value of a barrel of crude oil and the refined products — such as gasoline and heating oil — that can be produced from that barrel of crude oil. This spread is a strong indicator of how profitable oil-refiners are going to be. The wider the spread, the stronger the margins for the refiners and the more profitable they will be. The narrower the spread, the weaker the margins for the refiners and the less profitable they will be.

As you can see in Fig. 5, the crack spread widened significantly in late February and has remained elevated for the past few months.

Fig. 5 — Crack Spread

This has been a boon for companies like Tesoro Corporation (NYSE:TSO), Marathon Petroleum Corp (NYSE:MPC) and Phillips 66 (NYSE:PSX), which have all seen their stock prices rising during the past month, rather than falling with crude oil (see Fig. 6, Fig. 7 and Fig. 8).

Fig. 6 — Daily Chart of Tesoro (TSO)

Fig. 7 — Daily Chart of Marathon Petroleum (MPC)

Fig. 8 — Daily Chart of Phillips 66 (PSX)

It’s been good to be a refiner during the past few months. However, the crack spread is starting to narrow once more, which means refiners may not be quite as hot moving forward.

The Bottom Line for Energy Stocks

While it doesn’t look like crude oil prices are going to be rallying in the near future, it’s important to remember that not all energy stocks react the same way to falling oil prices.

This is a good lesson to learn for the market in general at the moment. While the S&P 500 may pull back a bit or may continue to climb to new all-time highs, individual sectors within the market are going to respond independently. Some will rise while others fall, which should give us plenty of profit-generating opportunities in the future.

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