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Broader Market:

Crude prices pushed below the major psychological threshold of $95 per barrel on Friday.

In fact, oil prices finished down for the fourth consecutive week amid lingering concerns that the global growth is still in low gear, translating into reduced demand through 2014. Coupled with ever-increasing supplies on the back of modern technological advancements, and political stability in producing countries, crude fundamentals appear bleak. Investors are also apprehensive that this month’s 16-day U.S. government shutdown has eroded demand in the worlds biggest oil consumer.

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

As per the EIA’s weekly ‘Petroleum Status Report,’ crude inventories climbed by 4.1 million barrels for the week ending Oct 25, 2013 to 383.87 million barrels. A steep rise in Gulf Coast supplies on the back of lower refinery utilization rates led to the massive stockpile build-up with the U.S. even as imports fell.

What’s more, storage at the Cushing terminal in Oklahoma, the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange, was also up 2.2 million barrels, the third straight weekly gain.

Weighed down by these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil was firmly in the red and settled at $94.61 per barrel, losing 2.9% for the week.

On the other hand, the broad-based S&P 500 index edged up 0.1% and finished the week at 1,761.64, two days after reaching a lifetime intraday high of 1,775.22. Traders digested an exceptionally strong U.S. manufacturing data, weighing it against the probability of an earlier-than-expected tapering of Federal Reserve’s stimulus program. 

The Sub-Sectors:

Integrated: A drop in refining profitability has hurt the major integrated players, ultimately dragging down their third quarter earnings. In particular, Anglo-Dutch supermajor Royal Dutch Shell plc and U.S. energy behemoth Chevron Corp. (CVX - Analyst Report) were the worst affected, down 2.9% and 2.1% for the week, respectively. Refinery overcapacity and weak fuel demand squeezed their downstream profitability, weighing on the prices the operators can charge.

As it is, most of the ‘Big Oil’ is suffering from marginal or falling returns irrespective of the crude price movement, reflecting their struggle to replace reserve base and maintain production growth, as access to new energy resources becomes more difficult.

Bucking the trend was British giant BP plc (BP - Analyst Report), whose U.S.-listed shares gained 6.6%. Notwithstanding the refining struggle, BP not only beat earnings forecasts, but also announced a share repurchase program, a payout hike, and an asset-sale plan.

Exxon Mobil Corp. (XOM - Analyst Report) – the world's largest publicly traded oil firm – was another solid performer, adding 2.1% to its share price last week. The company came out with a quarterly beat, backed by higher liquid and natural gas prices.

E&P: While all crude-focused stocks stand to lose from falling commodity prices, companies in the exploration and production (E&P) sector are the worst placed, as they are able to extract less value for their products. Last week, the SIG Oil Exploration & Production Index traded down 2.1%.

Top decliners include Cabot Oil & Gas Corp., whose shares shed 5.3% during the week. Much of this seems to be tied to the natural gas producer’s failure to match its earlier blowout quarters. Though the company actually beat earnings estimates, it was not enough to appease investors, who expected a revenue growth of around 50%, more than the actual jump of 47%.

New York-based oil and natural gas producer Hess Corp. (HES - Analyst Report) was another laggard. Shares tumbled 2.7% last week, as the company came out with lower-than-expected third-quarter profit, beset by lower production resulting from various asset sales.

On the other end of the spectrum was domestic explorer LINN Energy LLC. Shares jumped 14.8% following a solid quarter with higher volumes and lower expenses that produced around $2 million of excess cash.

Oilfield Services: The oil services group – represented by the Philadelphia Oil Services Sector Index – edged up 0.2% through the week.

One of the top gainers was onshore contract driller Nabors Industries Ltd., which jumped 5.9% over the period despite a firm reason to justify the increase. Oceaneering International Inc. was another notable gainer after announcing record quarterly net income on the back of impressive demand for its subsea services and products.

On the other hand, shares of offshore driller Transocean Ltd. (RIG - Analyst Report) pulled back 3.9% through the week after the initial euphoria died down over its reinstatement into the S&P 500 index after a five-year absence. The Switzerland-based firm’s stock jumped 7.9% the week before on hope that the S&P 500 index funds will immediately be forced to buy the rig owner.

Refining & Marketing: This has been one sector that has underperformed the rest of the energy industry for the bulk of this year. With refiners being buyers of oil – whose price saw a steep climb recently – their third quarter profitability have been squeezed due to a rise in the input cost and lower crack spreads.

With the earnings season kicking off last week, these headwinds were reflected in disappointing results for sector components Phillips 66 (PSX - Analyst Report) and Marathon Petroleum Corp. (MPC - Analyst Report). Both downstream operators’ earnings were dragged down by low gasoline and diesel margins.

However, Valero Energy Corp. (VLO - Analyst Report) – the largest domestic independent refiner – was able to buck the negative earnings surprise trend. Shares of the company rallied, up almost 4% for the week, after it reported third quarter results well above expectations on the strength of higher throughput volumes that overshadowed weaker refining margins and steep costs.

On a brighter note, over the past fortnight or so, spreads have showed signs of strengthening yet again, pointing to the likelihood that the difficult operating environment could be over sooner than what many investors think.

Natural Gas:

Investors continue to focus on temperature patterns to understand the fuel’s economic dynamics. As it is, natural gas fundamentals look uninspiring with supplies remaining ample in the face of underwhelming demand.

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 38 billion cubic feet (Bcf) for the week ended Oct 25, above the guided range (of 33–37 Bcf gain). However, the increase – the twenty-ninth injection of 2013 – was lower than both last year’s build of 66 Bcf and the 5-year (2008–2012) average addition of 57 Bcf for the reported week.

While bullish speculators are betting on the upcoming winter heating season (Nov through Mar) to spur the commodity’s demand for heating, mild weather forecasts – for most of this month – have proved to be the dampener. As a result, natural gas spot prices ended Friday at $3.51 per million Btu (MMBtu), down 4.9% over the week.

Performance Chart:

Ticker

Last Week’s Performance

6 month performance

BP

+6.62%

+6.73%

CVX

-2.14%

-4.18%

RDS.A

-2.93%

-2.36%

COG

-5.25%

+3.16%

HES

-2.73%

+12.79%

NBR

+5.85%

+14.11%

RIG

-3.92%

-10.94%

VLO

+3.96%

+8.26%

This Week’s Outlook:

Apart from the usual suspects – the U.S. government data on oil and natural gas – market participants await a number of top-tier economic reports that will shed further light on how well the economy is doing in the fourth quarter. Of particular significance is Friday’s non-farm payroll report for Oct and Thursday’s preliminary data on third quarter U.S. GDP. 

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