Companies Affected Most by Oil Prices

The price of crude oil was rising again at the end of 2018, and that's unwelcome news for consumers who were finding it more expensive to fill up their cars. It's worth taking a look at the impact of the increase if it continues on the many industries that rely on oil as an input, such as transportation, producers of consumer goods and the food industry.

In September 2018, Brent crude oil prices averaged $79 per barrel, up $6 per barrel from August. The short-term forecast from the U.S. Energy Information Agency predicted an increase in the average price per barrel from $74  in 2018 to $75 in 2019. That's not a drastic change, but it may signal that the bargain prices of recent years are coming to an end.

Higher oil prices are good news for some industries. Obviously, they benefit petroleum businesses, and both positive and negative effects ripple through other parts of the economy.

Oil producers and the companies that support the energy sector all saw their share prices drop dramatically as the price of oil fell from above $120 a barrel to the $45-$55 range. It's a good bet that they will rise in 2019 if oil prices continue to go up. 

Oil Companies

The obvious link between oil prices and profitability is seen most clearly in the companies directly involved with the petroleum industry. The oil sector has various facets, including oil exploration, drilling, refining and distribution to consumers.

These pieces of the industry can be divided into two main groups: upstream and downstream companies. Upstream companies are directly involved in the exploration and production of crude oil. Their job is to locate and test potential drilling sites and then set up the facilities for oil extraction. Downstream companies refine and distribute the finished products, including gasoline and diesel fuel. (For more, see: The Difference Between Oil Services and Refiners.)

Upstream companies are hit hardest when oil prices fall since the price at which they sell oil is determined by the market, but their costs of production are largely fixed. If it costs more to produce a barrel of oil than it would fetch on the market, producers will incur losses and eventually go under. Large, expensive and capital-intensive drilling operations are hit harder than smaller, more nimble rigs, which can shut down temporarily and then restart once prices rise. Downstream companies will not be hit as hard since they profit by purchasing crude oil and selling the refined products at a premium. Their profit margins should remain fairly stable even with fluctuating oil prices.

Today, most of the big oil companies have both large upstream and downstream operations and are referred to as integrated oil companies. These companies saw their stock prices decline due to their involvement in upstream operations. Pure play upstream companies, who do not have a downstream component, saw their stock prices tumble even further. Pure play downstream companies that focus entirely on refining and selling finished products profited during this period of low oil prices.

The following table shows the six-month change in stock prices for some large integrated and pure-play companies during a period of falling oil prices:

Integrated Oil

Pure Play Upstream

Pure Play Downstream

Exxon Mobile (XOM) -8.2%

Transocean (RIG) -53.4%

Valero (VLO) +6.01%

Chevron (CVX) -13.63%

Diamond Offshore (DO) -28.00%

Tesoro (TSO) +36.21%

British Petroleum (BP) -12.21%

Patterson-UTI Energy (PTEN) -47.02%

Phillips 66 (PSX) -8.56%

Total SA (TOT) -17.08%

Nabors Industries (NBR) -52.38%

Marathon Oil (MPC) +14.55%

Phillips 66 (PSX) -8.57%

Anadarko Petroleum (APC) -23.58%

Alon USA Energy (ALG) -8.08%

Source: Reuters, Data as of 2/9/2015

Industrial Companies

Oil companies are not alone in feeling the pain of low oil prices. Manufacturers and industrial companies also feel the pinch as this industry is responsible for supplying the materials to build and expand oil drilling operations. In late 2015, oil producers did not undertake new projects and instead cut back production. Makers of steel, machinery and machine parts and heavy equipment were all affected by the downturn.

U.S. Steel (X) and ArcelorMittal (MT), two of the world's largest steel producers saw their shares drop by around 30% over the six months from September 2014 through February 2015. Caterpillar (CAT), which supplies heavy earth movers and other industrial vehicles to the oil industry, was down 18% over the same period. Halliburton (HAL), a diversified company specializing in oil field services to support the energy industry, was down 36.31%. Another company in the oil services sector, Schlumberger (SLB), was down nearly 21%.

Financial Companies

When oil prices are high, we see a flurry of new capital investment made to extract oil that would be considered too expensive to go for in times when oil is cheap. A prime example was the shale oil boom of the early 2000s that elevated the U.S. into a net oil exporter. Shale oil is costlier to produce. Many of those new drilling operators were forced to lay off workers and scale back production when prices fell. Some even filed for bankruptcy protection. Holders of bonds issued by this sector suffered losses as those debts were downgraded.

The largest U.S. financial sector players are well diversified and hedged in their loans extended to the energy sector. Certain smaller financial companies were particularly exposed. Regional banks in oil-producing regions were most likely to be hurt first. Canadian Bank of Nova Scotia (BNS) was down 19.12% in the months that ended in February 2014, having financed a number of extraction operations in the oil sands. Texas bank Cullen/Frost Bankers (CFR) was down more than 10% in that same period as nearly 12% of its loan portfolio was in the energy sector. Texas Capital Bank (TCBI) was down more than 7%.

The Bottom Line

Oil prices affect companies in many sectors well beyond the oil industry. The latest increase in crude oil prices is mild, and the effect on consumers has not been severe as of late 2018. But wise investors keep an eye on the ups and downs of crude oil prices. Their fluctuations have ripple effects throughout the U.S. economy. 

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