United States Oil Fund LP (ETF) (USO), Chevron Corporation (CVX): Will Oil’s Rally Continue?

The oil market is heating up. The recent developments in the Middle East and the start of driving season in the U.S. may have contributed to the recent rally of oil prices. Will the oil market continue to heat up? How will the latest developments in the oil market affect leading oil companies? Let’s analyze the recent developments in the oil market.

During June and July, the price of oil increased more than 8%. Furthermore, United States Oil Fund LP (ETF) (NYSEMKT:USO) also rose sharply during this time frame by a similar rate. This ETF follows the price of oil (West Texas Intermediate). This ETF’s net assets are estimated at $811 million as of July 2. The ETF’s main holdings include August contracts of WTI crude oil in the NYMEX and ICE markets.

United States Oil Fund LP (ETF) (NYSEMKT:USO)’s management expense ratio is set at 0.45%. Thus, holding this fund is a good way for investors to hedge or expose their portfolio to oil. Let’s take a closer look at the recent fundamental developments in the oil market, including changes in supply, demand, and storage.

Supply & Middle East

Even though OPEC’s production has remained stable in recent months, oil investors are still concerned by the recent developments in the Middle East, most notably the protests in Egypt against the current regime. Egypt doesn’t have a strong oil base, but its control of one of the most important checkpoints in the world – Suez Canal, through which nearly 3.8 million barrels per day are transported, is keeping oil traders concerned. Keep in mind, however, during the 2011 Arab spring that also erupted in Egypt, the Suez Canal remained open. Therefore, the current developments in Egypt are less likely to affect the shipment of oil via the Suez Canal.

The International Energy Agency estimates non-OPEC countries’ oil production will rise in 2013 by 1.1 million bbl/d (year-over-year). Based on the above, the oil supply in OPEC and non-OPEC countries is likely to keep oil prices from rising.

Oil companies’ profit margins

Leading oil companies such as Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are likely to benefit from the recent rise in the price of oil. Not only these companies’ revenues are likely to increase, but their profit margins are also likely to pull up.

As seen in the table above, the profit margins of
Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) were slightly lower in the first quarter of 2013 compared to the first quarter of 2012. One of the reasons for this drop in profitability was the 8% drop in oil price (year-over-year). In the second quarter of 2013, however, the price of oil is almost 1% higher than in the parallel quarter in 2012. This is likely to pull up the profit margin of Chevron Corporation (NYSE:CVX) and ExxonMobil in the second quarter of 2013.

Demand

The demand for oil in the U.S. is likely to pick up in the coming months as the driving season continues. Nonetheless, in the first five months of 2013, total gasoline station sales fell 0.9% (year-over-year), which is likely due to the low oil prices compared to the same time last year.