Case Study Solution - Oil Companies Thompson Reutter DataStream

Reutter Case

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Introduction

Organization of petroleum exporting countries (OPEC) group consists of the world’s largest oil exporting countries. It was founded in 1960’s by the five founding members; Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. However, it also has nine other members that are also exporting huge oil around the world. Similarly, the aim of founding the OPEC was to coordinate policies of the petroleum states, and provide technical assistant and economic aid to those member states to further strengthen their production of the petroleum in accordance with the international standards, and by caring the surrounding environment.

On the other hand, the group has been found to regulate the production oil in the member countries and to ensure that all operations are carried as per the guidance of group. Similarly, the Group is also responsible for reacting the market’s fluctuations. It also takes decisions regarding the production, and price of the oil as a whole. Apart from that, the group’s main aim is to collectively manage the overall production of the oil to avoid the competition among the countries that could have a negative impact in the global market.

In case if the price of oil is reduced over time in the global market, then, it would not have an impact on the oil producing companies, but it would also have an impact on the governments because their revenues would decline with respect to the reduction in oil prices. Thus, it could be determined that if the price of oil either increases or decreases, then it would have an impact positive or negative over many industries globally.

However, it is important that what impact does a particular region bear given the fluctuations in oil prices, and what impact would it have on the commodities’ prices, production prices, and the equity markets as well. All these are measured in the OPEC to react to the market to increase the oil prices to support the member countries’ declining revenues in the global market that might have a direct or indirect relationship with prices.

Background

The study is solely based on the empirical data about the oil producing countries, and experiences, and facts that had an impact on the global market. However, the topic of the study is to analyze the that how fluctuating prices of the oil following the OPEC meetings has had an impact on the stock price of oil companies, and other industries in Russia, and on some countries in Eastern Europe. Furthermore, it could be said that prices of the oil depend on the supply in the world.

However, following a reduction in prices could be the result of the high supply of the crude oil in the market which had given rise to the price reduction. Similarly, the oil producing countries are supposed to look at the global market as a whole. On the other hand, since January 2015 oil prices have reduced from $110 per barrel to $28 per barrel. Whatever reason was behind the reduction in oil prices is another debate. Nonetheless, the how does market especially the oil producing countries reacted to that fall of prices is imperative.

The countries that have founded the OPEC have to measure the risks, and respond as required or agreed with the member countries. See Figure 1. The figure shows the countries that are the members of OPEC and non-OPEC members as well. If we analyze the following meetings of the OPEC members over the sudden reduction in oil prices, then it can be seen that it was agreed that if the OPEC members have to respond the market to cut the combined production by 1.7 million barrel per day, then it would be logical, and reasonable to reduce the production of petroleum in the member countries to support the declining revenues of the governments.

Qualitative Analysis

United States, Russia, and China are also oil producing countries that might not have a negative impact, because they would only just regulate their countries. However, it is critical to look at the industry as a whole. It is also important to come across that either demand in the market has declined or the supply has increased, but it could still be said that the crude oil per barrel was stable at $110 until 2014. Nonetheless, since early 2015, oil prices globally have increased up to $40-$45 per barrel in the global market. Similarly, if further analyzed it could be seen that the global market’s effect would have affected other industries worldwide.

Russia is one of largest oil producers in the world similar to Saudi Arabia. With the help of this, it could be analyzed that these facts are crucial for making future assumptions based on some facts and figures. On the other hand, Russia could never be affected by the declining oil prices. Lastly, what impact it would have on the other continents remains an open challenging question to dig answer for.

On the other hand, there are many countries that are not the members of OPEC, and as a whole they produce half of the oil on a yearly basis. See exhibits 1. Furthermore, it could be determined that Russia, United States, and China are also oil producing countries in the world, but are not treaty members of the OPEC group. This is an issue, as to how would OPEC as the regulating body of the 12 oil producing countries’ decisions would affect the global market, and particularly some industries in Russia, and Europe.

On the other hand, it is another question as to what effect would the declining prices would have on the oil producing countries themselves. Therefore, it is argued as to why would it have an impact on the countries that are not members of OPEC, however they are one of the largest oil producing countries, so it could be said that they could manage oil prices domestically, and or react to the global changing oil prices. Apart from that, there would be no effect on Russia’s industry in any way, however, the industries in Europe would have negative consequences due to oil-richness.

However, the said negative impact would be on some companies whose production is based on oil. Nonetheless, there are some oil producing companies that would be negatively affected due to the reduction in oil prices in the market, which would reduce their bottom-line. Figure 2 shows the break-even analysis of different oil producing countries. However, it solely depends on the nature of industry as to how it is interlinked with the oil industry. Apart from that, the impact that the oil prices would have on the stocks prices would be analyzed in the quantitative analysis of the different companies from Russia and the United States.

Quantitative Analysis

The data was collected from Thomas Reutter database regarding the crude spot prices gathered on a daily basis, which helped determine the impact of the OPEC meeting held in Vienna, Austria and concluded on 30^th November 2016. In the meeting twelve members of the organization of petroleum exporting countries decided to cut production to off-set the recent decline in the oil prices, which, in turn, increased the oil prices globally, as a result showing significant growth in oil spot prices. However, it can be determined that the conclusion of the meeting would not substantially affect the Russian industries since Russia is a major producer of oil in the global market. Therefore, the conclusion of OPEC to cut production would not have any significant impact on the Russian industries. The country was proficient to fulfill its own oil requirements derived from the industries operating within the country. Furthermore, globally, the OPEC meeting attributed towards increasing the per barrel oil cost for those countries, who were minor producers or non-producers of oil.

The exhibit above illustrates the impact of the conclusion reached in the meeting held on 30^th November, 2016. The data was formulated using Thomas Reutter DataStream from November, 2016 to January, 2017 in which, it can be assessed that the oil prices before the meeting were relatively low ranging between $43.00 and $49.00 per barrel. However, after the meeting was concluded, the oil prices increased from $49.41 on 30 November to $51.08 per barrel the very next day. The oil prices remained consistently higher from the initial rate. Moreover, the percentage changes in the stock prices of oil companies namely, Exxon Mobil, BP, Royal, Chevron Corporation and Cocoon Philips are illustrated in the exhibit below, which would help evaluate the impact of the decision to cut oil production taken by the members of OPEC on the stock prices of oil companies. Additionally, it can be determined that the increase in the oil prices could potentially increase the stock prices of the relative oil industries available in the market.

It can be assessed from the graph above that the percentage prior to the meeting was mostly negative, which indicates that the earning per share of the stocks available in the market was low. Two days prior to the meeting, the percentage change in stock price of Exxon Mobil was 1.68% and on 29 November, it reduced a negative 0.068%. However, after the meeting was concluded, the percentage change of stock price of Exxon increased to 0.50% and remained positive, which indicated that the stock price showed higher growth potential and earning per share in the market. Furthermore, it can be determined that the investors in the market reacted positively, after hearing the conclusion of the OPEC meeting held, which increased their expectations from the shares of oil companies present as well as improved the investors’ interest in the stocks. This, as a result, increased the quantity demanded, while increasing the price of stocks on the stock exchange.

Therefore, it can be concluded that the overall impact of the OPEC decision to cut production had a favorable impact on the stock prices of the oil companies available on the stock exchange. However, it was also assessed that the favorable impact would be short lived, as the increase in oil prices would increase the inflation rates. Similarly, it would also have a tremendous impact on the automobile industry, hence decreasing the sales of multinational car manufacturing company around the world. It could also decrease the over purchase power parity of the customers available in the global market, which would compromise the customers’ ability to purchase expensive automobiles, which as a result, would decrease the overall revenues of the companies and decrease their share price in the market, as the investors would lose confidence in the company’s future prospects. Therefore, it can be determined that the European automobile market would suffer from the significant increase in oil prices, as it was recognized as one of the most elite automobile manufacturing industries. It produced highly technical supercars, which were expensive and appealed to the high profile customers segment.

Moreover, it can be determined that the OPEC decision would not have any significant impact on  the industries operating in Russia, as the country itself was capable to fulfill its energy requirements driven by the industries. Hence, it could be evaluated that the stock prices of these industries operating in the country would not decrease, allowing the investors to maintain their investing patterns. This would help ensure that no demand fluctuation takes place in the market, which could increase or decrease the stock prices of the companies.

Descriptive Statistics     

After implementing descriptive statistical analysis of the price of Crude oil, it can be assessed that Kurtosis calculated amounted to a negative 1.60, which indicates that the distribution was light tailed and probability that the next value generated would be low, was high, which meant that it would reach its outlier less frequently. The mean value calculated amounts to $48.89, which represents the average price of crude oil over the period of two months. Furthermore, the standard deviation was estimated at 3.44, which depicted the distance of the mean value from its outliers.  

After implementing descriptive statistical analysis of the price of Crude oil in Europe, it can be assessed that Kurtosis calculated amounted to a negative 1.70, which meant that it would reach its outliers less frequently. This indicates that the distribution was light tailed and the probability that the next value generated would be low was high. The mean value calculated amounts to $49.05, which represented the average price of crude oil over the period of two months. Furthermore, the standard deviation was estimated at 4.59, which depicted the distance of the mean value from its outliers. 

References

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Bowler, T. B. (2015). Falling oil prices: Who are the winners and loser. London: BBC News.

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Economist. (2016). OPEC reaches a deal to cut production. VIENNA: Economist.

Farrell, S. (2016). Oil Price and Stock markets rise as OPEC cuts crude output. N/A: The Guardian.

Investopedia . (2016). How much influence does OPEC have on the global price of oil? N/A: Investopedia.

Investopedia. (2016). organization of petroleum Exporting Countries - OPEC. N/A: Investopedia.

Kantchev, G. (2016). Oil Prices Await Effect of OPEC Deal. N/A: The Wall Street Journal.

Kemp, J. (2017). Saudis, Russia to diverge on the speed of oil output cuts: Kemp. N/A: Reuters.

Reuters Commodities. (2016). Oil Jumps over 10 percent as OPEC Finalizes output cut deal. N/A: Reuters.

Tully, A. (2015). How will the OPEC Meeting affect Oil prices? N/A: Oilprice.com.