XOM - XLE: Implication Of $100+ Per Barrel Oil Price On Energy Stocks

2024-04-11 10:48:57 ET

Summary

• Oil prices could return to $100 per barrel in the near future, in my view.
• If this happens, it can, of course, benefit an energy fund like Energy Select Sector SPDR® Fund ETF in general.
• However, by knowing the different levels of sensitivity of each sub-sector in the XLE ETF to oil prices, investors could optimize their strategy.
• We like integrated producers like Exxon Mobil and Chevron the best, and have mixed views on refineries like Phillips 66 and Valero.
• For more risk-tolerant investors, service companies like Schlumberger and Halliburton are attractive too.

Thesis

In a recent article on Exxon Mobil Corporation (XOM), I argued that oil prices could return to $100 per barrel in the near future. The article then detailed the potential impacts of a higher oil price on XOM’s profits and stock prices. The main drivers that I analyzed in that article are two-fold and quoted below:

The first one is inflation. As shown in the next chart, oil’s current prices are still about the same as they were back in 2014. Historically, oil prices have been rising more rapidly than inflation (see the chart below provided by the U.S. Energy Information Administration, EIA ). The CPI (Consumer Price Index) was 234 in 2014 and is now above 310. If oil prices were to rise in tandem with CPI, it would be about $114 per barrel now.

The second one involves the supply-demand imbalance caused by ongoing geopolitical conflicts. On the supply end, geopolitical tensions and production cuts by the OPEC (Organization of the Petroleum Exporting Countries) can persist and keep restricting oil supply. On the demand end, as global economies recover and travel restrictions ease, I expect demand (in terms of volume) to keep rising.

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