After the vigorous recovery of the financial markets since the March low, investors no longer have many options for a large upward bet. However, there is one sector that is lagging behind and that is energy.
The Vanguard Energy Index Fund ETF (NYSE 🙂 – whose top 10 positions include Exxon Mobil (NYSE :), Chevron (NYSE 🙂 and Phillips 66 (NYSE 🙂 – continues to decline by more than 40% this year, even as it recovered almost all of its losses from the dip in March.
The latest trend in the oil markets suggests that energy supplies can withstand the worst of the pandemic crisis, as demand for oil slowly increases fueled by both OPEC + production cuts and reopening of countries after COVID-19- blockades, reviving industrial production and putting cars back on the road.
According to a recent report, China's oil demand has almost returned to the level of the last time Beijing imposed a national shutdown to combat the first coronavirus outbreak. Given that China is the world's second largest oil consumer, behind only the US, the country's rapid turnaround has contributed to its supply in the petroleum market declining earlier than expected.
deposited in negative territory in April has recently been a vessel.
Uneven Recovery
Despite the recovery in the oil markets, there are two possible reasons why investors are wary of the industry. First, the energy market is not yet out of the forest. In many countries, the first wave of the pandemic continues to accelerate. Coronavirus cases are on the increase in parts of the American South and West, even as some states lift the restrictions. In India, the death toll has risen above 20,000 as the subcontinent struggles to contain the pandemic.
Threats of a potential second wave also loom, as well as related damage to growth, both of which have caused an uneven recovery in the oil markets. demand has led to the recovery as people choose to drive their cars to avoid public transport, but demand for industry and aviation is still low.
Diesel, a fuel that is more closely related to the business cycle as it drives industrial efforts and freight, is lagging as the global economy remains under recession. And the demand for jet fuel is almost as low as during the peak of the coronavirus outbreak.
Dividends In Danger
As if economic uncertainty was not enough reason to stay away from energy stocks, there is an additional risk for buy-and-hold investors, uncertainty about the sustainability of dividends. A massive drop in oil prices in the first quarter has forced some of the largest US gas and oil producers to freeze or cut benefits.
In April, Royal Dutch Shell (NYSE 🙂 cut its dividend by 66% to $ 0.32 per quarter for the first time since World War II. At about the same time, oilfield service provider Schlumberger (NYSE 🙂 cut its dividend by 75%, the first cut in at least four decades. For the time being, oil and gas company Halliburton (NYSE 🙂 has made it clear that they have postponed cutting but would have no qualms about it if need be.
Exxon and Chevron are among those energy majors who have so far deviated from their benefits, but that situation could change if the world sees a further drop in demand, or the alliance to falter supply among OPEC + producers.
Exxon warned investors last week that the company is likely to report a second quarterly loss on a quarterly basis when it announces the second quarter 2020 results on Friday, July 31, before opening.
Lower oil and gas prices are likely to reduce production profits by an estimated $ 2.5 billion to $ 3.1 billion compared to prices, the producer said in a regulated application. That unit reported $ 536 million in profit in the first quarter.
Exxon expects tighter margins in converting oil into fuels such as gasoline and diesel and higher costs associated with moving crude oil through North America to reduce refining profits by approximately $ 800 million to $ 1.2 billion the previous quarter will decrease. The refining operations reported a loss of $ 611 million in the first quarter. Exxon's shares closed at $ 43.24 on Tuesday, down 2.59% for the day. case in the current economic environment. Their profits are falling and their dividends are under threat.
These companies are most exposed to negative headwinds, partly due to an oversupply of oil, natural gas and liquefied natural gas. That situation is unlikely to change as long as the pandemic continues to accelerate and sentiment moves away from fossil fuels.
