A few weeks ago, when it was announced that Exxon Mobil (XOM) was being unceremoniously dumped from the Dow Jones Industrial Average, that news was bound to usher in another period of weakness for the once-dominant but already embattled U.S. oil company. At the time I thought that at some point, that selling would be overdone and XOM would represent value. That time has come and there are both fundamental and technical reasons to believe that.
Before we look at those though, lets address the elephant in the room. Energy, in general, and big oil, in particular, has had a very bad year. Hell, it has had a bad decade! That has led some prominent commentators, most notably CNBC's Jim Cramer, to pronounce the sector "uninvestable" to use his word. You should, however, keep one thing in mind. Cramer and others of his ilk aren't really in the investing or trading business, they are in the entertainment business. In that business, sensational beats accurate every time.
The fact is that discounting the recent major disruption, oil demand is still growing and is expected to continue to do so for several years to come, even in the face of EVs and concern about the climate. Even when, and if, that growth reverses, the decline in liquids demand is anticipated to be extremely slow. That means lower output than at the peak maybe, but as we are already at massively reduced production due to Covid-19, the trajectory from here can still be up.
That is why what we are talking…
A few weeks ago, when it was announced that Exxon Mobil (XOM) was being unceremoniously dumped from the Dow Jones Industrial Average, that news was bound to usher in another period of weakness for the once-dominant but already embattled U.S. oil company. At the time I thought that at some point, that selling would be overdone and XOM would represent value. That time has come and there are both fundamental and technical reasons to believe that.
Before we look at those though, lets address the elephant in the room. Energy, in general, and big oil, in particular, has had a very bad year. Hell, it has had a bad decade! That has led some prominent commentators, most notably CNBC's Jim Cramer, to pronounce the sector "uninvestable" to use his word. You should, however, keep one thing in mind. Cramer and others of his ilk aren't really in the investing or trading business, they are in the entertainment business. In that business, sensational beats accurate every time.
The fact is that discounting the recent major disruption, oil demand is still growing and is expected to continue to do so for several years to come, even in the face of EVs and concern about the climate. Even when, and if, that growth reverses, the decline in liquids demand is anticipated to be extremely slow. That means lower output than at the peak maybe, but as we are already at massively reduced production due to Covid-19, the trajectory from here can still be up.
That is why what we are talking about here is basically the timing of an investment, and there are some signs that the time to buy has arrived.
First, as devastating to oil demand as the coronavirus shutdown and subsequent gradual recovery has been, it was always going to be temporary. At some point, there will be both a vaccine and an effective treatment regimen for the virus and we will all get back to our everyday lives, including driving and flying and oil demand will rise again. When it does, the effects of a rig count reduced by over 400 since last year, and the large number of bankruptcies among smaller oil companies will be felt and prices should hold up well.
There are even some indications that that scenario is already beginning to play out. This week's EIA inventory report showed a larger than expected build in the headline number, but is you dig a little deeper, the positive reaction of crude shortly after the release makes sense…
The numbers suggest that although there was a short-term inventory build, the longer-term dynamic of recovering demand and still restricted supply remains intact. Gasoline inventories fell last week by nearly three times as much as crude stocks rose. There are two obvious implications of that.
One is that the build will be temporary, and the dynamic that has led to an overall reduction in crude stocks of over 15 million barrels over the last 5 weeks will resume soon. The other is that one of the main drivers of oil demand, gasoline usage, is recovering quickly in the U.S. Indeed, the total gasoline supplied to the market last week was down only 6.7% year-on-year, not bad given the state of the economy.
From a fundamental perspective, then, a long-term investment in something like XOM at these levels makes sense. The chart suggests that now is a good time to do that.
The most recent decline in XOM, prompted by being dropped from the Dow, finally reversed and showed signs of a bottom a week ago at a low of $32.21. That will lend some support, as will the March long-term low at $30.11. The latter is the logical level off which to base a stop, somewhere just below $30, which, with the stock trading just below $35 this morning, keeps potential losses under 20%, with a substantial potential upside.
In those circumstances, grabbing XOM now, while the dividend yield is just below 10%, looks like a risk well worth taking.
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