Major Integrated Oil & Gas Industry Leads Basic Materials Higher

Michael Teague  |

Oil & gas majors ended higher on Tuesday as the industry advanced over its peers by a factor of two, and lifted basic materials to the second-best performing sector of the day. Basic materials stocks were up nearly 9 percent, bested only by the monstrous performance of the industrial goods sector, up nearly 190 percent by the closing bell.

On a day that saw the price per barrel of West Texas Intermediate crude drop 1.7 percent to just over $107, the majors responsible for lifting the industry higher on Tuesday included smaller-sized companies, as well as a number of non-US companies.

US-based Chevron (CVX) , the UK’s BP Plc (BP) , and France’s Total SA (TOT) were the most heavily traded of the companies ending the day in the positive, but their gains were relatively minute.

The $1 billion market-cap Petrobras Argentina SA (PZE) , on the other hand, jumped over 2.7 percent to $5.32, while micro-cap US-based Rose Rock Midstream L.P. (RRMS) rose more than 2 percent to $33.48 by the closing bell. Other notable gains include Colombia’s large-cap Ecopetrol SA (EC) , up 1.7 percent to $46.36, and the US’s small-cap EQT Midstream Partners LP (EQM) also added 1.7 percent to $45.

Major integrated oil and gas firms have struggled lately. Lower crude prices earlier in the year put a damper on profits, and the world’s major energy companies have had to settle for falling short of production targets in the face of a diversity of obstacles ranging from refinery outages to concerns about the volatile situation in West Asia and the Mediterranean, and not least to the increasing gravitational pull of North American shale.

This last obstacle is perhaps the most significant. Fires can be extinguished, and refineries can be repaired, but adapting to a market that is undergoing drastic changes is another matter entirely, and oil majors have been slow to the punch with the North American shale boom.

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Concerns about the region commonly referred to as the Middle East, these are threefold, with only one of them being directly related to oil and gas. Libyan oil, the lightest and sweetest crude around, has largely stopped flowing of late as a result of the recent empowerment of unruly militias who, under cover of NATO airpower, toppled the decades old dictatorship of Moammar Ghadaffi in 2011. These various groups have run circles around a hapless government, and have given free rein to their proclivity for disrupting the country’s oil producing facilities in order to create political leverage.

Syria and, to a lesser extent, Egypt, are both experiencing their own crises. As absolutely dismal as both of their predicaments are, and however much the events in those countries constitute a blemish to the principle of respect for human life, their effects on the global energy economy remain an unpredictable variable (so long as they do not metastasize beyond their borders and ignite an overt regional war, that is).

The price-per barrel of oil is a necessary point of reference when talking about both the economy in general, and the industry in particular. Over the last three years of turmoil unleashed throughout North Africa and the Eastern Mediterranean in the wake of the now-deceased Arab Spring and subsequent counter-revolutionary backlash, unrest has played the role of all-purpose explanation for higher crude prices.

Readers can be excused for drawing negative conclusions from any news that foretells of more expensive products and commodities. But worrying about higher prices at the pump, or even greater costs for industries whose manufacturing operations rely on oil and gas, can obfuscate the fact that energy producers benefit greatly from higher crude prices, so long as demand for it holds up.

Majors performed well today despite the relatively lower price of oil, which at least in part was the result of the short-term postponement of US airstrikes on Syrian targets that resulted from that country’s self-proclaimed willingness to turn over its arsenal of chemical weapons to international custody.

That said, oil prices are still relatively high, especially when compared to the $89 per barrel that we saw back in January. Furthermore, the president has hinted at his willingness to go ahead with military intervention in the Syrian civil war irrespective of next week’s congressional vote on the matter. All of this could encourage higher prices at any given time, and the major integrated industry could reap substantial gains as a result.


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