A perfect storm has been keeping oil under pressure recently.
First, the coronavirus pandemic depressed demand as people around the world hunkered down at home, and travel and manufacturing slowed to an almost dead halt. And then Saudi Arabia and Russia started an oil price war last month over a disagreement on production cuts amid a crushing decline in demand.
Crude prices shot up today after President Donald Trump said that the two countries were going to start discussing ending their price war. Trump said in a tweet that he had spoken to Saudi Crown Prince Mohammed bin Salman who had spoken to Russian president Vladimir Putin.
“I expect and hope that they will be cutting back approximately 10 million barrels, and maybe substantially more,” Trump said in the tweet.
However, despite the gains seen today, West Texas Intermediate Crude is still down nearly -60% year-to-date while Brent Crude is down roughly -55% so far this year.
And even with a substantial cut in production, it may not be enough to counter the oversupply brought about by both Saudi Arabia and Russia increasing production during the unprecedented slow in demand produced by the coronavirus pandemic.
“The challenge though is the size of the oversupply problem,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy. “Saudi Arabia and Russia won’t singlehandedly remove for instance half (5 million bpd) of their [country’s] oil production to save the potential 10-12 million bpd of upstream shut-ins required to balance the market in the second quarter. At best, we believe parties will agree to continue discussing and monitor the market situation.”
Such a “disastrous situation” is bad news for energy stocks, but Simpler Trading’s director of options, Danielle Shay, says that there are two names in the space that have the best chance of survival.
“The only [names] in this situation that are going to be able to survive are ones that have enough cash on hand with a low debt-to-equity ratio,” Shay said this week. “These names are really just going to be Chevron (NYSE: CVX), Exxon (NYSE: XOM), and then the big names that are going to have enough money to get through this.”
According to Newton Advisors’ Mark Newton, oil hasn’t reached a bottom yet.
“I know it’s tempting to think we’ve had this giant decline and it’s ripe for this group to bounce back, but you really just need to see more signs of stabilization,” Newton said.
Looking at the XOP S&P Oil & East Exploration & Production ETF, which is down -64.5% since the start of the year, Newton says the ETF “should likely continue to underperform” even given that it is massively underperforming the market now, with the S&P 500 down -22% in the same timeframe.
“To even expect some type of stabilization, you really need to see above up over $36, which was hit last Thursday, and that could potentially help this group get into the low to mid $40s,” Newton said.
The XOP ETF is currently -6.5% below the $36 level. And while Chevron and Exxon are down -37% and -42%, respectively, they are still outperforming the rest of the energy sector.