Oil Stocks Rally on Europe but Can it Last?

Brittney Barrett  |

U.S. stocks gained sharply in morning following as support from German Chancellor, Angela Merkel for a resolution of the issues facing Greece, bolstered investor optimism. The possibility of the default and the notion of European debt contagion have both been contributing factors in the recent volatility and in the afternoon, new data indicating a split within the eurozone on the second bailout package for Greece led to significant paring of the morning’s gains.

The Financial Times reported a divide within the eurozone on the conditions of Greece’s second $148 billion bailout package. As many as seven of the 17 members are in favor of private creditors accepting a larger write-down on their Greek bond holdings, an issue that is likely to continue to delay a final decision on which investors can act. The primary concern driving the disparity is that the funding needs of the nation have escalated considerably over the past couple of months. There are diverging opinions on how much the private sector should be responsible for these issues.

Among the areas impacted by this was oil, which rose in the morning as investors were heartened by the possibility that the severity of the Greek crisis may have been eased. The dollar fell on the notion of a potential euro recovery, making commodities more attractive.

Oil has been headed sharply lower, hitting a 52-week low recently and prompting a split among analysts who believe oil stocks will recover and others convinced profit could fall an additional 15 percent next year.

Today in trading, evidence seemed to be on the side of the bulls, but it would be difficult to make a determination on the direction of oil until after some finality is reached in Europe.

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The largest components of energy stocks mirrored the trajectory of the NYSE Arca Oil Index, which thrived in early trading only to end narrowly ahead for the day at large.

Exxon Mobile Corp. (XOM) and Chevron Corp. (CVX), both of which were pummeled in trading last week began to climb back from recent lows yesterday. The rally extended into Tuesday, but like the rest of the market, began to weaken as the bell approached.

Exxon believes it will succeed in booking the oil and gas reserves it uncovers in an Arctic and Black Sea venture the company has embarked on with OAO Rosneft, though its partner owns the licenses. The company added that it believes the region is among the prime areas of exploration around the world. Exxon agreed to the deal with Rosneft at the end of August and pledged to spend roughly $3.2 billion on gas and oil exploration.

While the oil will likely be a boon for the company in the long-term, short term oil demand fell by 2 percent last week in the U.S. Additionally, the American Petroleum Institute announced oil inventories in the U.S. added 568,000 barrels last week while gasoline stock piles grew by 4.6 million barrels.

Typically, data indicating a significant decline in demand would take the wind out of a rally, but because of oil’s recent and prolonged weakness many investors are taking any sign pointing away from a financial collapse as a reason to snap up oil stocks.

Also benefiting from this for the day was Hess (HES). Hess’s CEO John Hess cautioned that a shock may be arriving as a result of recent disinterest in the sector.

“An energy crisis is on its way and it’s likely to be triggered by oil,” he said. “$150-a-barrel oil was a warning.”

Whether or not Hess is correct is in his assumption, he seemed to convince some investors who sent Hess up more than any other major oil company in the sector for the day.


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