I suggested in prior post that oil would be in trouble due to the COVID-19 impact on fuel demand. The stocks are being clobbered, and one might be tempted to ‘buy low.’ After all, Chevron’s dividend yield is above 5%. Exon Mobile’s dividend yield is nearly 7%. However, experience has taught me that when it comes to the stocks of energy companies, they tend to outperform the crude price (overshoot) and under-perform when oil prices are falling. You can see this is the below chart comparing the price of Chevron (as one example) to the price of WTI crude.
An advantage the U.S. has enjoyed over the past year is rising exports. According to the recent Energy Information Administration (EIA) Weekly Report:
U.S. crude oil exports averaged 2.98 million barrels per day (b/d) in 2019, an increase of 930,000 b/d (45%) from 2018 (Figure 1). The number of destinations for U.S. crude oil exports increased from 41 to 44, and Canada continued to receive the largest share (15%, or 459,000 b/d), followed by South Korea (14%, or 426,000 b/d). U.S. crude oil exports to China, the third-largest export destination in 2018, fell by nearly 100,000 b/d to average 133,000 b/d in 2019.
Although exports from the US to other countries more than offset the decline in China last year, this won’t be the case for the next several months or even years. It is also unlikely OPEC can afford to reduce production sufficiently to help the industry in a meaningful way. We need to wait for demand to rebound to normal levels and there’s no telling at this juncture how long this will take. No wonder then that crude futures prices are heading south. Just be aware the stocks will head even further south. The opportunity to buy will be provided when we see inventories of crude far above the five-year average but no longer climbing. You won’t want to buy (no analyst will be sticking their necks out to recommend the stocks), but that’ll be the time to step up and make some serious money. Yes the dividend yields are way up there…until they cut the dividends.
