A Comparable Analysis of How Regional Oil Supply Shocks Affect Petroleum Equity Prices

This study examines how regional crude oil supply shocks affect the equity prices of large-cap oil companies compared to small/mid-cap exploration and production (E&P) companies. The event used in this paper as the regional supply shock is the Winter Storm Uri, the February 2021 Texas freeze that physically shut U.S. crude production and cut national weekly output by 1.1 million barrels per day, equaling the largest weekly decline on record at the time (U.S. Energy Information Administration [EIA], 2021). This experiment uses a single-factor market model that is estimated over 100 trading days and a six-session event window (τ = −1 to τ = +4). Abnormal returns were calculated for four large-caps (XOM, CVX, SHEL, TTE) and four small-and mid-cap firms (MUR, CDEV, TALO, WTI). During the first trading session after the freeze (τ = 0, February 16, 2021), the small/mid-cap group had a mean abnormal return of +4.67% versus +3.06% (large-cap group) which was a differential of +1.60%. This is further significant under Welch’s unequal-variances t-test (t = 3.12, p = .021). The differential did not continue as it reversed at τ = +2 (−2.23%, p=.063) since oil production shut-ins were a counter to the benefit of higher crude prices for producers whose own wells were frozen. Event-window volatility for the small/mid-cap group was 2.07 times that of the large cap group (Brown–Forsythe W= 6.71, p=.013). Cumulative abnormal returns were more favorable to the small/mid-cap group (+11.85% vs. +8.65%), but the 3.2% differential was not significant (p=0.146). In summary, regional crude supply shocks ultimately do produce an immediate price differential that is more favorable towards smaller firms that are concentrated in upstream operations.