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Is Big Oil Immune To The Coronavirus?

For many months, oil and gas prices had remained stubbornly low despite a flurry of supply chain disruptions that could potentially offer support. Oil and gas prices remained grounded despite long-term U.S. sanctions on oil flows out of Iran, production cuts by OPEC+ and a blockade in Libya with no end in sight--all of which add up to a sizable 6% loss of global supply. 

At the same time, the COVID-19 pandemic had crushed the demand side, with the International Energy Agency (IEA) last month slashing its 2020 oil demand growth forecast by 365,000 bpd to 825,000 bpd. Oil and gas prices seemed to respond strongly to the expected lower demand a not to the supply disruptions--a clear sign that the coronavirus fears far outweighed even unprecedented declines in supply.

Nevertheless, a cross-section of Wall Street remained sanguine that Big Oil had enough gas in the tank to weather the ongoing storm, with the likes of ExxonMobil, BP and Total expected to maintain their long-term investment roadmaps without significant changes.

But that was before the markets threw us a really big curveball--an all-out price war between Saudi Arabia and Russia, two of the largest crude producers.

Price war

Before Saudi Arabia and Russia went into fisticuffs, the consensus seemed to be that global E&P spending would remain largely unaffected because most operators had based their 2020 projections on an average WTI price of $50/barrel. Some though were less optimistic that short-cycle projects that include U.S. shale could sail through unscathed. 

But that was before a totally unexpected bogeyman appeared on the scene with the worst-case scenario playing out.

Oil prices crashed nearly 26% to settle at WTI price of $31.13/bbl on Monday after OPEC and Russia failed to reach a deal to further cut oil prices amid a sharp fall in demand. The producers not only failed to agree on a new proposal to cut another 1.5 million b/d from their current output but also did not sign off on an extension to the current cuts of around 2.1 million b/d that’s due to expire at the end of the month. The unexpected standoff left the market shell-shocked and further accelerated the oil selloff that was already deep in a bear market.

Sensing defeat, Saudi Arabia did an about-face and announced stunning discounts of $6 to $8 per barrel for its customers in the United States, Asia, and Europe in a desperate attempt to avoid ceding further market share to its rivals.

The oil price war shocks reverberated through the entire global market and few were spared.

The energy sector’s popular benchmark, the Energy Select Sector Fund (XLE), plunged 20.1% and is still more than 40% down in the year-to-date even after paring back some of the losses on Tuesday.

As expected, deep-pocketed oil majors with the wherewithal to weather the storm better than their smaller brethren fared better than most--but were still absolutely annihilated.

Leading E&P names were badly hammered, with ExxonMobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) recording declines of 12.2% and 15.4%, respectively.

However, the oil majors had nothing on smaller drillers.

Apache Corp. (NYSE:APA) and Occidental Petroleum (NYSE:OXY) each lost more than half their values on the day to finish 53.9% and 52.0% lower, respectively.

Marathon Oil (NYSE:MRO), Hess Corp. (NYSE:HES) and ConocoPhillips (NYSE:COP) did not fare much better, losing 46.6%, 33.7%, and 25.3%, respectively.

Dead Cat Bounce?

In a welcome turnaround, the energy sector has enjoyed a nice bounce after Trump offered a helping hand while Russia hinted at a possibility to return to the negotiating table

President Donald Trump on Monday said he will be taking “major” steps to protect the U.S. economy against the impact of the coronavirus outbreak and is set to discuss a payroll tax cut with congressional Republicans on Tuesday.

Meanwhile, Russian Energy Minister Alexander Novak told reporters that the nation Moscow ‘‘...had not ruled out measures with OPEC to stabilize oil markets,’’ as per CNBC.

Oil prices and energy stocks are enjoying a broad bounce on the news, with WTI Crude oil April 2020 futures CLJ20, up nearly 11% to $34.51/barrel. Meanwhile, XLE has shot up 4.5% after tumbling 20% on Monday. 

Among the biggest early gainers, Occidental Petroleum Corp. shares have rocketed 14.4%, Apache Corp. has hiked up 12.9% while Marathon Oil Corp. has soared 21.2%. 

Elsewhere, shares of Exxon Mobil Corp. have gained 3.2% while those by Chevron Corp. have climbed 5.3%.

But this could be just another dead-cat bounce.

As Adam Crisafulli, founder of Vital Knowledge and former author of Market Intelligence at JPMorgan Chase, has cautioned via MarketWatch, a full recovery for energy stocks is going to be a tough call with energy prices remaining so depressed. Despite the latest rebound, current oil prices are still too low for even the most efficient producers to break-even and could go even lower as Goldman Sachs has warned.

Energy stocks remain highly vulnerable, especially if and when they start cutting dividends as OXY stock has demonstrated.

As long as the huge supply/demand imbalances in the oil and gas markets persist, not even the oil majors will be immune to another huge selloff.

By Alex Kimani for Oilprice.com

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