Oil Prices and Oil Stock Prices

   By Bob Shapiro

I see in the commodities markets that the price of oil has gotten into the mid 50s, after spending years it seems in the 40-50 Dollar range. Prices always fluctuate, but this uptick at least bears watching.

As with many resources, oil exploration and development takes years, so once the decision is made, the cost to produce oil from any particular well or oil field are known. Yes, costs also fluctuate for oil production, but in a very narrow band. So, what happens when prices fluctuate is that it is magnified when the bottom line is calculated.

Take a well for which the all-in costs are around $40 a barrel. If the price is $50 a barrel, then the company earns $10 profit per barrel. If the price goes up to $55 a barrel (as $WTIC is today), then this 10% rise in price has produced a 50% jump in profit. That’s some leverage. Since stock prices fundamentally are tied to profit, then oil stock prices also are leveraged to the price of oil. Today, compared to the price of oil, the price of the oil stocks is around as low as it’s been over the last 5 years.

If the $55 price of oil continues, then as oil companies start reporting earnings over the next few quarters, profits likely will be nicely higher than in previous quarters / years, and this should cause an oil stock rise. There is no way to tell if the $55 price will contiue, but there also is no way to know whether the price may continue up to around $60, generating even higher profits and oil stock prices.

As I said, it bears watching.

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4 thoughts on “Oil Prices and Oil Stock Prices

  1. Hi Bob How much is the price of oil going up in relation to the war talk in Saudi Arabia. I’m thinking that with tacit approval from USA the Saudi’s will declare war on Iran and then the price of oil will go straight up

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    • Hi Steve.

      War in that part of the world is only minutes away all the time – the political and religious leaders over there have almost zero respect for the lives of their subjects who will do the dying (and those poor souls don’t have the brains to know any better).

      And, rather than tacit approval, the US has tended to instigate in the past – not sure if that is continuing.

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