As anyone who drives a car can attest, there was no sharp rise in oil and gas prices in 2012. In fact oil prices declined. Though consumers will probably agree that the current prices are far from ideal, it should not take away from the fact that overall oil prices pulled back this past year. Now while this is great for consumers, it can be problematic for investors with long positions in major oil companies. The decrease in oil price has put pressure on a number of oil companies, which has resulted in those stocks seeing little growth over the past year. Now that 2012 is behind us, the question is whether oil will bounce back in the new year.
The price of oil is affected by a number of factors. Supply and demand of both OPEC and non-OPEC nations, supply and demand of developed and non-developed countries, global inventories, and the financial markets all play a roll in determining crude oil prices. As such, there is no single answer as to why volatile oil prices occur.
However, there are some indicators as to why the markets have seen a drop in oil in 2012. More and more countries are becoming less dependent on Middle East oil supplies, which historically have been the major source of all things oil in the world. Specifically, the two largest oil consumers — the United States and China — have made strong pushes to move away from foreign energy sources and become energy independent in the near future. Because of this, the sociopolitical turmoil see in the Middle East in 2012 had less of a dramatic affect on the overall price of oil that has been the case in years past.
The supply of oil is not the only economic factor in transition; demand for oil has been fluctuating as well. Overall, OECD (developed) countries consume more oil than non-OECD countries but that demand has been in decline over the past couple of years. Meanwhile, non-OECD countries have experienced a rise in demand for oil but on a smaller basis compared to developed countries. So while demand has seen a bit of decline while supply has started to increase, this has helped contribute to the decrease of oil prices.
Furthermore, the financial markets also played a roll in pushing down oil prices. Not only do market participants buy and sell physical oil, but they also trade future contracts and other oil derivatives. This trading is mainly speculation based on factors such as the supply and demand of oil mentioned above. However, external factors like overall economic concerns also play a roll in determining how speculators and traders buy and sell. All of this activity affects overall oil prices. Many insiders believe that because the financial markets have contributed and even allowed oil prices to fall, it might be a signal that the markets are concerned of economic troubles ahead.
So since there are a variety of factors that have contributed to lower oil prices in 2012, it is hard to pinpoint any specific reason that has brought about the current situation. Looking forward, many analyst believe a lot of the same is in store for 2013.
Now you may be asking how all of this affects dividend investors. Well, as oil prices fall it puts pressure of various dividend paying oil companies as it obviously affects their revenue sources. Though this might be the case, major oil firms like Exxon Mobil Corporation (XOM) (up slightly in 2012 at +2.11%), Chevron Corporation (CVX) (up +1.64%), and ConocoPhillips (COP) (up +6.87% since its repositioning in May of 2012) have all outperformed overall oil prices (which, as stated above, decline in 2012). However, this does not necessarily mean that these companies can keep their current financial and production path in 2013 and expect to out pace oil prices. Many of these oil companies have given weak earnings forecasts, signalling some measure of potential pullback that these stocks might see in the coming year.
While some oil companies saw small growth despite market problems, there were others that struggled in 2012. BP (BP) was down -2.57% for the year. While BP has had its fair share of problems in recent years (see fallout from Deepwater Horizon disaster), it still shows that there has been a lot of pressure on these major oil companies over the past year which has been somewhat correlated with a decline of oil prices.
Part of the overall problems with both oil prices and oil companies is the development of natural gas and renewable energy that has become a big player in recent years. As the overall energy market changes, it will continue to cause problems to these oil companies unless a substantial effort is made to reconfigure their business to adapt to the changing energy environment. Most of these companies have added assets in response to the natural gas boom, but it has not resulted in sweeping changes in fundamentals and stock growth.
Though these companies may struggle to see stock appreciation over the next year, dividend payouts by these companies are in a position to stay stable even in face of market concerns. Exxon Mobil has a dividend payout ratio of 22%, which means that it only pays out 22% of its earnings to shareholders as dividends. This low payout ratio tends to be stable, meaning that the company will be able to afford to continue its current dividend payment with a possibility of a dividend increase if it so desires. Chevron’s dividend payout ratio is 28% while ConocoPhillips and BP are both at 33%. All four of these companies seem to be in prime position to continue being solid dividend investments.The Bottom Line
A decline in oil prices, a changing energy market, and economic concerns will all contribute to a potential volatile year for oil companies in 2013. While this does not necessarily mean across the board losses, it makes it tough for investors to decide whether oil companies are attractive plays in the new year. But this does not mean all is bleak when investing in oil companies. Though share price appreciation might not be the reason to invest in these oil companies, the firms still offer attractive and stable dividends that could show returns to portfolios in 2013.