In a previous post we have extended our original pricing model for ConocoPhillips and found that the evolution of its share can be best approximated by a linear function of the difference between the core CPI, coreCPI, and the consumer price index of energy, eCPI. Originally, the model for a share price, p(t), (we use a monthly closing price adjusted for dividends and splits) was based on the difference between the core and headline CPI:
p(t) = A + B (coreCPI - CPI(t)) (1)
where A and B are empirical constants; t is the elapsed time.
Here we test pricing models for ExxonMobil, XOM(t), with the same CPI and PPI components as we used for ConocoPhillips. The set of defining indices includes the core and headline CPI, the consumer price index of energy, eCPI, and the producer price index of crude petroleum, pPPI, together with the overall PPI. Thus, we test model (1) with p(t)=XOM(t) and two different models for the period between 2001 and 2011:
XOM(t) = A1 + B1(coreCPI - eCPI(t)) (2)
XOM(t) = A2 + B2(pPPI - PPI(t)) (3)
Figures 1 through 3 compare three XOM models. Coefficients in (1) through (3) are given in corresponding Figure captions. The best model (in sense of RMS residual, s) for the period between 2001 and July 2011 is based on the core and headline CPI (s=$9.32). Almost the same accuracy is associated with the model based on the core and energy CPI (s=$9.84). At the same time, model (3) based on the producer price indices is the worst (s=$10.9).
There is a dramatic difference between ExxonMobil and ConocoPhillips. The former company was less sensitive to the change in consumer prices during the financial crisis. The predicted amplitude is much higher than that observed between 2008 and 2009. ConocoPhillips has followed up the change in the difference between the core and energy CPI. When the behavior between 2008 and 2009 is extrapolated into the 2010s, the expected fall in oil price at a five-year horizon down to $30 per barrel will likely not result in a proportional decrease of XOM’s shares.
Figure 1. The observed XOM price and that predicted from the core and headline CPI. A=$86, B=-5.8.
Figure 2. The observed XOM price and that predicted from the core CPI and the consumer price index of energy. A1=$56, B1=-0.27.
Figure 3. The observed XOM price and that predicted from the overall PPI and the producer price index of crude petroleum (domestic production). A2=$68, B2=-0.55.