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Oil Company Stocks and the $50 Mark

Hurricane Harvey is pushing oil prices back near $50, which according to recent history seems to be the magic number for oil company stocks.

The devastation of Hurricane Harvey has pushed oil prices back up near $50 a barrel for the first time in more than a month. While no one with a heart or a conscience should be happy about what caused oil prices to spike, the fact is that oil company stocks tend to prosper when crude oil tops $50 a barrel.

The Energy Select Sector SPDR Fund (XLE), whose holdings include most of the major oil company stocks, is up 3.5% in the week since Harvey (the S&P 500 is basically flat). Exxon Mobil (XOM) is up 3.3%, Chevron (CVX) is up 3.1%, ConocoPhillips (COP) is up 4%. It’s nothing new. Energy stocks and oil prices have been joined at the hip for quite some time.

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And there seems to be extra weight attached to the $50 mark. In the last couple of years, look at what has happened to oil company stocks (as measured by the oil ETF) on the few occasions when crude prices have poked their head above $50 (right around the 13% mark on the chart).

Oil company stocks tend to move in tandem with crude prices - and spike when prices exceed $50 a barrel.

The higher above $50 crude oil prices are, the further energy stocks advance, with the biggest spike in the XLE coming last December when crude prices hit a two-year high above $54 after OPEC put a cap on production.

Prior to the big up-move in November and December, the net effect of all the ups and downs in oil prices was that energy stocks had barely budged for a year. But the OPEC-fueled price spike finally moved the needle for energy stocks in a meaningful way.

Since then, oil prices have mostly been below $50, with the 200-day moving at $49.56 per barrel. It’s no surprise, then, that oil stocks are down nearly 14% this year. Should prices move above $50 and then some, we could see a rally in oil company stocks like the one we saw last November and December.

The good news, if you’re an energy investor, is that oil companies are growing again. Exxon Mobil grew profits in each of the last two quarters after nearly three years of no growth. Ditto Phillips 66 (PSX). Chevron’s and Kinder Morgan’s (KMI) earnings per share have expanded for three straight quarters. You get the idea.

A return to growth, and in some cases profitability, is due in large part to more stable oil prices after the huge comedown from $100 oil in late 2014 and 2015. It took more than a year for oil companies to adjust to crude prices being slashes in half. But it seems many of them are finally adapting.

It hasn’t yet translated to higher prices for oil company stocks. But a push back above $50 oil would help. If prices stay there, it would help even more.

Hopefully, it won’t take another catastrophic natural disaster to trigger higher oil prices. With that in mind, best wishes this week to those of you who live in South Florida and the Caribbean. Let’s pray that Irma is more merciful than Harvey.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.