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Crude prices edged lower, legendary investor Warren Buffett took a stake in Exxon Mobil Corp. (XOM - Analyst Report) and Carl Icahn agreed to make peace with Transocean Ltd. (RIG - Analyst Report).

Broader Market:

Crude prices declined last week despite Janet Yellen’s ‘dovish’ testimony.

In fact, oil prices finished down for the fifth time in six weeks 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 last month’s 16-day U.S. government shutdown has eroded demand in the worlds biggest oil consumer.

Separately, the Nov 2013 Empire State Manufacturing Survey released by the Federal Reserve Bank of New York indicated that manufacturing conditions weakened partially for New York manufacturers. Oil traders often refer to manufacturing statistics as yardsticks to gauge the future fuel demand growth.

Sentiments were further dampened by the Energy Information Administration (EIA) report that showed another big jump in inventories, which remains above the upper limit of the average for this time of the year.

As per the EIA’s weekly ‘Petroleum Status Report,’ crude inventories climbed by 2.64 million barrels for the week ending Nov 8 to 388.09 million barrels. 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 1.69 million barrels, the fifth straight weekly gain.    

In another piece of news coming out from the EIA, monthly U.S. crude output in Oct – at 7.7 million barrels per day – overtook imports for the first time since Feb 1995. With the U.S. awash in crude, the International Energy Agency (IEA) predicts that the country will leapfrog Russia and Saudi Arabia to claim the world’s ‘top oil producer’ tag by 2015.

As a result of these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil was firmly in the red and settled at $93.84 per barrel, losing 0.8% for the week.

On the contrary, the broad-based S&P 500 index gained 1.6% and finished the week by hitting a new record high of 1,798.18. The market’s phenomenal run – notching up its sixth consecutive week of gains – was mainly driven by Federal Reserve chair nominee Janet Yellen’s recent comments before the Senate Banking Committee that gave indications that the current $85-billion stimulus program devised to support the economy will continue for some time. 

The Sub-Sectors:

Integrated: Almost all major integrated players traded in the black, with the major newsmaker being Exxon Mobil Corp. The world's largest publicly traded oil firm added 2.7% to its share price last week after Warren Buffett’s Berkshire Hathaway Inc. revealed that it had acquired an additional stake worth $3.45 billion in the company on Friday.

Anglo-Dutch supermajor Royal Dutch Shell plc (RDS.A - Analyst Report) was another top gainer, whose U.S.-listed shares were up 3.6% over the week after it closed in on a deal with the Iraqi government to set up an $11 billion ethane-cracking facility in the southern part of the country. Separately, Shell said that it would be partnering Chinese giant Sinopec to probe wells in the largely unexplored central China to examine the shale potential in the region.

E&P: Last week, the SIG Oil Exploration & Production Index traded up 1.0%.

Top gainers include Pioneer Natural Resources Co. (PXD - Analyst Report), which soared 7.0% on Wednesday after coming out with news of more success in its core Spraberry/Wolfcamp region in West Texas’ Permian Basin. One of the largest operators in the oil-rich area, Pioneer announced production from two horizontal wells, at impressive rates.      

U.S. energy firm Apache Corp. (APA - Analyst Report) added 3.0% to its stock price, as it continued offloading oil, gas acreage in an effort to boost valuation and lower debt. The company completed the sale of 33% of its ‘risky’ Egypt business for around $3.0 billion.

On the other end of the spectrum, shares of Denbury Resources Inc. (DNR - Analyst Report) shed 8.8% during the week. Much of this seems to be tied to the investors’ thumbs down to the American oil and gas producer’s restructuring plan. Shares sunk after Denbury nixed the idea of pursuing a master limited partnership (MLP), citing ‘no clear long-term benefit for shareholders’.

Oilfield Services: The oil services group – represented by the Philadelphia Oil Services Sector Index – was up 0.9% through the week.

Leading the pack was Transocean Ltd., which gained 2.9% through the week after the proxy battle between the incumbent management and activist investor Carl Icahn for the control of offshore drilling giant came to an end on Nov 11, with the former partly yielding to the terms of Icahn. Per the deal, Transocean agreed to boost its annual dividend to $3 per share. Moreover, with two seats in the Icahn-proposed smaller board (11 against the previous 14) that management has agreed to, the billionaire investor seems to have firmly secured his place in the Switzerland-based company. 

Refining & Marketing: All major downstream stocks traded in the black, with the top gainers being Marathon Petroleum Corp. (MPC - Analyst Report) and Tesoro Corp. (TSO - Analyst Report), which advanced 10.0% and 8.9%, respectively, over the week.

After going through a bumpy ride for much of 2013, the sector has started to look up in recent weeks – and it’s mainly to do with the ‘oil spread’, the difference between the WTI price and its global counterpart, Brent. With refiners being buyers of WTI, while selling their products based on Brent, the wider the so-called ‘Brent-WTI spread’, the better it is for the sector components. 

During the last few weeks, WTI and Brent have been heading in opposite directions. In fact, the WTI price has receded to the sub-$95 per barrel level but Brent has stayed strong, at around $109 per barrel. This has widened the oil spread at over $10 per barrel, thereby boosting refinery stocks.

Additional support has come from a recent Environmental Protection Agency (EPA) proposal, which entails a relaxation in its renewable fuels requirements that would reduce compliance costs for refiners. This, in turn, will favorably impact earnings and cash flows.  

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. In fact, it is expected to take many years for the commodity’s demand to match supply in the face of newer projects.

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 20 billion cubic feet (Bcf) for the week ended Nov 8. Worryingly, though, the increase was in contrast to last year’s withdrawal of 12 Bcf and exceeded the 5-year (2008–2012) average addition of 19 Bcf for the reported week.

The bullish speculators are betting on the upcoming winter heating season (Nov through Mar) to spur the commodity’s demand for heating. Chilly weather forecasts – in the Eastern U.S. over the next ten days or so – have proved to be the catalyst. As a result, natural gas spot prices ended Friday at $3.66 per million Btu (MMBtu), up 3.4% over the week.

Performance Chart of Some Major Companies:

Ticker

Last Week’s Performance

6 month performance

XOM

+2.74%

+3.17%

RDS.A

+3.59%

-0.63%

APA

+3.01%

+9.41%

PXD

+2.49%

+32.74%

SLB

-0.86%

+18.86%

RIG

+2.89%

+1.18%

MPC

+10.03%

-8.48%

TSO

+8.86%

-14.67%

 

This Week’s Outlook:

Apart from the usual suspects – the U.S. government data on oil and natural gas – market participants will be closely tracking Wednesday’s minutes of Federal Reserve’s last meeting, together with data releases on retail sales and consumer prices.

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