Oil Crisis: Should you Buy or Sell Some Oil Stocks?

  • April 22, 2020 09:00 PM AEST
  • Team Kalkine
Oil Crisis: Should you Buy or Sell Some Oil Stocks?

Futures of West Texas Intermediate crude oil slipped below 0 to actually trade and record a negative price, which means that oil suppliers were actually ready to pay buyers to purchase some of their overflowing capacity as the storage cost, which coupled with convenience yield largely determine the price of oil futures, shot up.

Gold MTF non-AMP

However, while the bloodbath in the oil market continues, we should keep in mind that not all of the global oil trades on the price quoted on the America exchanges, that might also explain that why despite an unprecedented event in the oil market, the ASX-listed oil stocks did not undergo a large meltdown on the exchange, as compared to their global peers.

Some of the Australian oil producers do trade their oil through private accounts directly to refineries, and while the NYSE-listed oil stocks such as ConocoPhillips and oil-services stock such as Baker Hughes took a meltdown of more than 74 per cent and 50 per cent, the ASX-listed counterpart witnessed some relaxation with stocks like Oil Search Limited (ASX:OSH), Beach Energy Limited (ASX:BPT), falling by just 8 per cent, and 3.37 per cent from their 20 April close on 21 April, respectively.

So, does that mean its time for us to buy some oil stocks?

Well, it is the time like this when infamous quotes like buy when there is blood in the streets and be greedy when the market is fearful and be fearful when the market is greedy drums in the ear. It would not be prudent to pull a trigger in oil stocks prior considering the risk-to-reward profile.

The Global Oil Supply Glut and Weak Economy

As we have articulated time-to-time, the global oil market is under a supply glut, and as we mentioned previously, the recent U.S-backed oil supply agreement could be a failed stimulus in triggering a response from the global demand, which has plunged ~ 30.0 million barrels per day against the pre-crisis level.

Apart from that, the global economy is not exactly in shape to support the global oil demand overnight; thus, factoring these qualitative and quantitative figures is of paramount importance before reaching any decision to enter long or short into the oil market and oil-related stocks.

To Know More, Do Read: EIA Trims Crude Oil Average Price Forecast, While Saudi and Russia Scheduled to Pull A Chair to the Negotiation Table

While the agreement between the oil kingpin Saudi and Russia has been reached to trim out 9.7 million barrels of oil production per day, it would be implemented from 1 May 2020, in the meantime, the global oil producers would keep on pulling the oil amidst weak demand, and even post the implementation of the 9.7 million barrels per day of production cut, the global oil demand has oblique chances of spiking overnight.

To Know More, Do Read: Why US-Backed OPEC+ Production Cut Is a Failed Stimulus in the Status Quo?

So, why not sell the oil stocks?

While the supply glut is there, it is important to understand the dynamics of the oil market, major oil consumers such as China has resumed most of their daily activities, and the ongoing global lockdown is reaching the deadline. In fact, in some parts of the world, some relaxation in travelling could also be seen, which albeit would not surely cover for the 30 million barrels per day of demand loss but could impact the short-term movement in the oil market.

Also, these are unprecedented times, and forecasting anything in the status quo, would require a lot of qualitative and quantitative assumptions, which are liable to show many outliers, which particularly makes it hard to fathom the future of the oil market and the oil-related stocks.

Surely, the opportunity could be lucrative, as the stocks are relatively cheaper, and a speculator would easily say well it is the black gold we are talking about, and what could possibly be worse than what is seen. Well frankly, no one even anticipated a negative price for the oil market a year back, when oil stood as the poster boy in the wake of tensions in the Middle East.

Thus, yes, the opportunity could be profitable, but it is up to an individual investor to assess the risk-to-reward profile or amount of volatility they are ready to deal with in these unprecedented times.

Some Stats That Could be of Help

In its April 2020 oil market report, the International Energy Agency anticipated that the global oil demand could fall by a record 9.3 million barrels per day on a y-o-y basis in 2020. The demand for oil in April 2020 is forecasted to decline by 29 million barrels per day against the previous corresponding period (or pcp), which corresponds to the level seen in 1995.

IEA also anticipates that the demand would improve slightly during the second quarter of the year; however, would remain down by 23.13 million barrels per day against pcp. Also, the organisation projects that the demand would gradually improve during the second half of the year but would remain 2.7 million barrels per day lower in December 2020 on a y-o-y basis.

On the supply counter, IEA anticipates that the global oil supply would plunge by a record 12 million barrels per day in May 2020, while the effective production cut from OPEC would reach 10.7 million barrels per day.

The non-OPEC production is also forecasted to witness a decline with the output falls estimation of 5.2 million barrels per day during the fourth quarter of the year 2020, while for the year as a whole output is estimated to decrease by 2.3 million barrels per day against the previous year.

As per the IEA estimations, the implied refining stocks in China during the first quarter had reached 2.1 million barrels per day, while stocks increased by 0.5 million barrels per day across the United States.

To Know More, Do Read: The Oil Spill: U.S. Refineries Pullback Production as Acquisition Cost Surmounts and Demand Tumbles

While the above-presented forecast suggests that the global oil demand could remain low again pcp, it also suggests that it would improve ahead slightly on a monthly and on a quarterly basis; however, investors should also consider the stance and balance sheet strength of individual oil companies to come to a meaningful conclusion.

Many oil companies across the continent suggest that they could actually bear as low as a price of $20 per barrel of oil, as they hold vast diversification across projects and strong hedge, and investors should first become familiar with these nuances to reach any conclusion to buy or sell, as these are some of the determining factors which would decide the direction of oil stocks ahead.

In the status quo, many oil companies such as Oil Search have raised capital as well, which provides them with a cash buffer and brings down their overall risk profile.

To Know More, Do Read: Oil Search Shifts the Paradigm from Just Cost-Saving to Capital Raising, Completes Institutional Placement

Apart from that, many oil players are scrutinising their cost as well and are implementing many cost-saving measures to sail across the stock market.

To Know More, Do Read: Beach Trims Costs, Lowers All Guidance; US Operations Under Pressure of ASX-Listed Oil Producers FPL, ATS, 88E, BYE

Thus, we would say that though the opportunity could be lucrative, an investor should consider and think over the above-presented facts and figures to devise their risk-to-reward profile to fathom the direction of the oil market and oil-related stocks ahead, and act wisely.



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