Global oil markets are in the midst of the wildest ride anyone has ever seen. After a massive drop in a matter of four weeks, they carried on their history last week in hopes that a price war between the world's largest producers would end.
That resurgence came after the US said it is negotiating a production cut between Saudi Arabia and Russia after both countries stepped up production in their struggle to gain market share, despite declining demand due to the pandemic of the coronavirus.
WTI Futures Weekly Price Chart
This is reviving the buying interest in shares of the largest oil producers who saw their share prices collapse during the COVID-19 crisis. Exxon Mobil (NYSE :), the largest US producer, has gained about 30% to $ 39.21 since March 23. Likewise, another top producer, Chevron (NYSE :), has risen 42% since the March low and closed at $ 75.11 on Friday.
But despite the rise in oil supplies, the climate for energy companies remains uncertain and hostile. Futures fell as much as 12% on Sunday due to new concerns about delays in the potential deal between the Saudis and the Russians.
The OPEC + block, including Russia, will hold a virtual meeting on April 9 instead of Monday after divisional reports have been released. Saudi Arabia and Russia have indicated they want the U.S. to join an agreement, but President Donald Trump had only hostile words to OPEC on Saturday and threatened foreign oil to protect the domestic oil industry.
The goal of conversations, first revealed by Trump last week, is to cut oil production by about 10% – the largest coordinated reduction ever.
Even if a deal is made for as many as 10 million barrels a day, it will barely make a dent, which is estimated to be a staggering 35 million, according to Bloomberg data. In some corners of the physical market, prices have already gone negative and traders have put oil into tankers at record rates to store it at sea.
Investment case for Chevron and Exxon
That grave the supply situation does not make oil supplies optimistic, even if we take into account a possible deal between the largest producers on oil production. For those investors looking to take a position in energy stocks, experts recommend staying with companies with quality balances.
Exxon Mobil Weekly Price Chart
Simpler Trading director of options Danielle Shay told CNBC in a recent interview that only the largest oil companies will survive in this "disastrous situation" for crude producers.
"The only [names] in this situation who will survive are those who have enough money on hand with a low debt-to-equity ratio," she said. "These names are basically going to be Chevron, Exxon, and then the big names that will have enough money to get through this."
In addition to the volatility of oil prices, investing in oil supplies in this environment carries many other risks. To save money, major oil companies were able to cut their dividends and stop their share buyback plans – two major attractions for investing in oil supplies.
In the first round, many companies announced drastic cuts in their investment plans. Chevron cuts its capex budget by 20% and, after buying back $ 1.75 billion worth of shares in the first quarter, suspended repurchase until further notice.
Chevron Weekly Price Chart
ConocoPhillips (NYSE 🙂 also announced a similar move last month, cutting investment costs and shortening its share buyback program. Exxon may be the next to announce such measures if oil prices do not recover.
While oil stock yields are already at an extreme level of financial difficulty, it is difficult to predict which producers will eventually take the dangerous path to reduce their sacred benefits – many of which have endured numerous downturns and even financial survived the crisis. from 2008.
Exxon Mobil CEO Darren Woods said on Investor Day of the company on March 5 that Exxon is "committed to a reliable and growing dividend". The company has increased benefits every year for the past 37 years.
Bottom Line
Buying oil supplies is a risky bet in the current environment. Producers do not have many options at their disposal to deal with this demand shock, other than cutbacks and save money. The sector as a whole is likely to underperform the market even when the recovery begins.
