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Broader Market:

Last week, energy stocks eked out small gains amid concerns over supply disruptions from a tropical storm, even as the Washington drama over budget negotiations and debt-ceiling talks continued to hog the limelight from everything else. 

The U.S. was forced to shut down certain government operations last week – the first time in seventeen years – as politically divided lawmakers failed to strike a short-term funding measure ahead of the Sep 30 deadline when the existing authorization ran out. Consequently, around 800,000 federal workers were laid off and scores of nonessential services halted. This has kept crude prices under pressure, as U.S. is the world's biggest oil consumer and a continued impasse in government activities will lead to a reduction in the fuel’s demand.

Sentiments were further dampened by a bearish Energy Information Administration (EIA) report that showed another big increase in inventories. 

(Read our full coverage on the EIA release: Oil Scales $104, Even as Supplies Jump)

However, energy stocks staged a turnaround on Friday, ending the week on a slightly positive note. By close of trade on Oct 4, West Texas Intermediate (WTI) oil was marginally in the black and settled at $103.84 per barrel, gaining 1.0% for the week, as a storm warning in the Gulf of Mexico prompted producers to shut in almost 70% of the region’s oil output.

The Sub-Sectors:

Integrated: Almost all major integrated players except Eni SpA traded in the red, with the top loser being Chevron Corp. (CVX - Analyst Report), which shed 3.7% over the week despite a firm reason to justify the pullback. On the contrary, the company signed a long-term agreement to sell 900,000 tons of liquefied natural gas per annum from its Wheatstone venture in Australia to Japanese utility Tohoku Electric Power Co.

Europe’s largest oil company Royal Dutch Shell plc (RDS.A - Analyst Report) was also in the news last week, as it started production from the second development phase of the Parque das Conchas (BC-10) project off Brazil's south-east coast, while planning to sell its stake in the Eagle Ford Shale in Texas.

E&P: While all crude-focused stocks stand to benefit from high commodity prices, companies in the exploration and production (E&P) sector are the best placed, as they are able to extract more value for their products. Notwithstanding the overall flat industry trend, the SIG Oil Exploration & Production Index traded up 2.5% during the week.

Two of the best performers last week were domestic explorers Harvest Natural Resources Inc. (HNR - Snapshot Report) and Sanchez Energy Corp. (SN - Snapshot Report), shooting ahead of their peers with additions of 15% and 8% to their respective stock prices. While Harvest Natural Resources moved higher after announcing that it is in negotiations to sell its stake in Gabon for $137 million, Sanchez Energy’s gain was tied to the completion of its purchase of acreage in South Texas’ McMullen County.    

On the other end of the spectrum, Forest Oil Corp. (FST - Analyst Report) topped the losers’ chart last week, dropping 7.6%. Shares of the Denver-based energy explorer plunged following the decision to sell its Texas Panhandle assets for $1 billion. Apart from the price tag, which does not appear to reflect any premium, questions have been raised about the firm’s future growth. Post sale, the oil and gas producer will be left with just about 28,000 net acres in the Eagle Ford and East Texas regions, that too dominated by natural gas whose economics is floundering.     

Oilfield Services: The oil services group – represented by the Philadelphia Oil Services Sector Index – was up 2.4% through the week. With oil prices staying north of $100 a barrel and rising capital spending, the industry is positioned for better times ahead.

It was a relatively dull few days for the equipment suppliers following the eventful previous week where two companies – National Oilwell Varco Inc. and Noble Corp. – announced spin-offs. The only newsmaker happened to be onshore contract driller Nabors Industries Ltd. (NBR - Analyst Report), which entered into an agreement with Alaska-based Bristol Bay Native Corp. to sell its 100% ownership interest in subsidiary Peak Oilfield Service Co. for an undisclosed price. The transaction, representing Nabors’ objective to focus primarily on core operations, was apparently welcomed by investors with shares up 6.3% through the week.    

Refining & Marketing:This has been one sector that has underperformed the rest of the energy industry. With refiners being buyers of oil – whose price has seen a steep climb recently – their profitability are being squeezed due to a rise in the input cost and lower crack spreads. What’s more, the headwinds are expected to continue during the next six months, translating into a difficult earnings outlook through the first quarter of 2014.  

However, with crude not moving much last week, major downstream stocks were mixed. A notable gainer was Phillips 66 (PSX - Analyst Report), which advanced 1.1% over the week. The oil refiner on Wednesday said its board approved a quarterly dividend of 39 cents per share, up 7.75 cents, or 25%, from the prior quarter.

Natural Gas:

Natural gas spot prices tumbled to below $3.50 per million Btu (MMBtu) on Thursday, Oct 3, following the U.S. Energy Department's weekly inventory release that showed a larger-than-expected rise in the commodity’s supplies. On a further bearish note, the storage build was also higher than the benchmark 5-year average gain for the week.

Mild weather forecasts – which could slow demand even more – further worsened the situation. However, natural gas ended slightly higher Friday (at $3.51 per MMBtu), as investors closely tracked the development of a tropical storm activity in the Gulf of Mexico that could disrupt production from the energy-rich region. 

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 101 billion cubic feet (Bcf) for the week ended Sep 27, above the guided range (of 93–97 Bcf gain). The increase – the twenty-fifth injection of 2013 – also exceeded both last year’s build of 77 Bcf and the 5-year (2008–2012) average addition of 82 Bcf for the reported week.

(Read our full coverage on the EIA release: Massive Injection Pressures Natural Gas)

Performance Chart:

Ticker

Last Week’s Performance

6 month performance

XOM

-0.67%

-3.05%

CVX

-3.68%

+0.05%

RDS.A

-0.59%

+1.49%

COP

+0.94%

+19.51%

FST

-7.57%

+7.96%

NBR

+6.27%

+7.47%

VLO

+0.41%

-11.56%

PSX

+1.09%

-8.99%

 

This Week’s Outlook:

With the shutdown robbing us of economic data, this week investors will be closely tracking Wednesday’s minutes of Federal Reserve’s last meeting, when they surprised everyone with a ‘no Taper’ verdict. The minutes are expected to provide a good sense of how close the call actually was, which will help set expectations about the central bank’s coming meeting.

Traders have voiced concerns that Fed’s shift away from the bond buying policy may lead to dollar-denominated oil prices to increase in local-currency terms in emerging markets, thus slowing growth.

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