The sharp tumble of oil prices in recent weeks seems to take its toll on Exxon Mobil Corporation (XOM). If this fall in oil prices will continue, by how much will it affect XOM (assuming all things equal)?
The price of WTI has gone down dramatically in recent weeks: since the beginning of May the spot price fell by nearly 12.6% (up to May 22nd) and the WTI C12 (12 month future) also declined by 11.5%. The robust oil production of OPEC in recent months despite the tension between Iran and the U.S, the rise in OECD inventories, the slow recovery of the U.S economy and the ongoing debt crisis in Europe may have all played a role (to a certain degree) in the recent drop in oil prices. I still speculate, assuming all things being equal, oil prices will further decline in the weeks ahead of us.
Furthermore, Exxon Mobil Corporation also declined during May by 4.4%. The recent first quarter reports of the company might have also adversely affected the stock as the company's performance didn't show much improvement or growth compared to the parallel quarter in 2011.
But let's examine the oil price effect on the stock price. To that end I will examine the relation between WTI oil price (C12) and the stock price of Exxon Mobil Corporation . In a side note, why I use C12 over the spot price or one month future, I will talk about in a future post, but in short C12 is a better fit in examining XOM.
The chart below presents the development of the stock vs. the changes in the oil price (C12 future) during 2012.
As indicated from the chart, both rates are strongly linked. In fact during 2012 the linear correlation between the daily percent changes of WTI oil (C12 future) and XOM stock price was 0.49, which is a very strong and robust figure. This means that the volatility of oil price might account at best for nearly a quarter of the volatility in the stock of XOM.
Furthermore, in the financial reports of the company, the share of oil and oil equivalent products account for nearly half of the company's revenue. This figure coincides with the liner correlation between the stock and WTI price.
Assuming a linear relation between the two indexes, this could mean (assuming all things being equal) that if oil price were to shed another $10 off its value and reach the low 80s, the stock price of XOM could decline by as much as $3 to $4 (I won't bore you with the calculation, but I have done it via calculating the beta of the two indexes' percent changes and translating the difference from percent changes to dollar changes).
Therefore the current downward trend of oil prices is likely to continue having a limited yet strong effect on XOM stock.
For further reading: Why the Recent Rally in Natural Gas won't help XOM
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.