Will Oil Come Down in 2013? – Chevron Corporation (CVX) and More

Despite the recent drop in refinery inputs, major refineries stocks such as Valero Energy Corporation (NYSE:VLO) and Marathon Petroleum Corp (NYSE:MPC) have spiked since the beginning of the year — shares of Valero spiked by 38.4% (year-to-date); shares of Marathon Petroleum, by 20.2%.

Oil price’s rise may have helped pull up the value of these companies. Further, if oil prices will remain higher than in previous years, it could augment these companies’ operating profits and free cash flow.

These companies’ free cash flow remained positive during the first nine months of 2012: Marathon’s free cash flow (FCF) reached $1.4 billion; Valero Energy’s FCF was $2.5 billion. This allowed these companies to improve their financial situation by repaying debt or by buying back stocks. Valero Energy paid back during 2012 nearly $2.2 billion of its debt. Marathon repurchased $800 million of its stocks. Therefore, a rise in oil prices and refineries input could keep these companies on this path.

OPEC
left its total production unchanged in recent months despite the tensions between Iran and the West. On the other hand, non-OPEC countries’ production slightly declined during January. If the production won’t increase in non-OPEC countries this could also contribute to the rise in oil prices.

Demand

From the demand standpoint, the US economy has contracted in the last quarter of 2012: the GDP shrunk by 0.1%. Furthermore, the EU economy has also contracted during the fourth quarter of 2012 by 0.6%. The leading economies in the EU have also contracted: Germany’s GDP fell by 0.6%; France’s GDP, by 0.3%.

These figures suggest the demand for oil in these economies has contracted in the last quarter of 2012. Despite these figures, the IEA estimates the global oil demand is expected to rise by a higher rate than it had been estimated in previous months. This could be due to a colder winter than last year and the rise in demand in Asia, including China and Japan.

My guess is that the price of oil will remain around the 90s and perhaps even reach the 100s in the weeks to follow. But if the projected demand will continue to fall, this will eventually lead to a pull back in the price of oil. I suspect that as the year progresses, the price of oil will eventfully come down to the 80s price range.

For further reading:

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The article Will Oil Come Down in 2013? originally appeared on Fool.com and is written by Lior Cohen.

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