ASX-Listed Oil & Gas Stocks Show Massive Gap Downs; Is the OPEC Effort Going in Vain?

  • June 13, 2020 02:00 PM AEST
  • Team Kalkine
    Team Kalkine
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ASX-Listed Oil & Gas Stocks Show Massive Gap Downs; Is the OPEC Effort Going in Vain?

Summary

  • Many of the ASX-listed oil & gas stocks have witnessed a sudden and a considerable breakdown gap during the trading session on 12 June 2020 amid a significant decline in crude oil prices.
  • Crude oil prices were hit by the dual-edged gizmo of the surprise build up in the U.S. commercial crude oil inventory (excl. SPR) and Fed’s economic outlook-which anticipated a fall of 6.4 per cent in the domestic economy.
  • While the OPEC and allies are bringing in a lot of supply cuts, the market is considerably undermining the supply side and responding quickly to the indication of demand-related factors.
  • So, is the OPEC’s effort to bring stability in the oil market by playing the supply cut card going in vain?
  • A look at the CBOE index for reckoning the same.

ASX-listed oil stocks are once again facing the heat as crude oil market is under pressure with Brent crude oil futures plunging 14.76 per cent from its recent top of USD 43.41 per barrel (intraday high on 8 July 2020) to the present low of USD 37.00 (as on 12 July 2020, 3:04 PM AEST).

The crude oil market was impacted by the dual-edged gizmo of strong build up across the United States commercial crude oil inventory (excluding the strategic petroleum reserve) and Fed’s anticipation of a 6.5 per cent decline in the U.S. economy for the year, which once again, raised speculation concerning the oil demand, and the price fell, despite ongoing measures taken by OPEC and allies to trim the volatility down.

Recently, OPEC had decided to extend the previous deadline of ongoing commitment, under which OPEC and allies are trimming 9.7 million barrels of production per day, by another month- now till July 2020, and apart from that the cartel had allowed some time to members who have not been complying with the landmark agreement.

To Know More, Do Read: Oil Market Not Out of The Woods Yet- Says OPEC Secretary General HE Mohammad

A few days back, Nigeria suggested that it would now fully comply with the OPEC agreement and would bring down its production.

Apart from that, the oil kingpin-Saudi Arabia, UAE, and Russia had decided to pull another voluntary production cut of 1.18 million barrels per day till July 2020.

While OPEC and allies along with other significant oil-producing countries such as the United States are playing the card of production cut, the speculation related to demand is now pulling the major strings in the oil market, keeping a lid on the ASX-listed oil & gas stocks, which so far followed the oil market lead.

To Know More, Do Read: ASX-listed Oil Stocks Following the Oil Market Lead- OSH, ORG, and WPL

Oil prices took a hit of ~ 7 per cent on 11 June 2020 after the United States Energy Information Administration (or EIA) reported a surge of 5.7 million barrels in the U.S. commercial crude oil inventory (excl. SPR), which took the total inventory to 538.1 million barrels (as on 5 June 2020), which in turn, took the inventory about 14 per cent above the five year average for this time of year.

U.S. weekly commercial crude oil inventory change (Source: Refinitiv Eikon Thomson Reuters)

U.S. weekly commercial crude oil inventory change (Source: Refinitiv Eikon Thomson Reuters)

The sharp build up in the commercial inventory across the United States once again concerned the investing community over the global oil demand, which is yet in peril, and the production trim would not be the cure-all for the oil market.

While the fall in the oil market was evident, some independent analysts believe that it was a result of a speculation and market panic considering the sharp build up in the U.S. commercial inventory, and the long-term prospect of oil would depend upon the demand from China and many other oil-consuming nations.

In its monthly MOMR, OPEC had anticipated that the global demand would plunge by 9.07 million barrels per day to stand at 91.10 million barrels during the year 2020, and while OPEC and allies are trimming 6.7 million barrels per day of production with some even contributing an additional production cut of 1.18 million barrels per day.

While the production cut is coming closer to the estimated decline in the demand by OPEC, the market is now concerned about the demand, and indication concerning the global oil demand would dictate the price action going forward.

The same could be confirmed by observing the CBOE oil market volatility index and the recent price behaviour of the crude oil prices.

CBOE crude oil market volatility index and Brent futures prices (Source: Refinitiv Eikon Thomson Reuters)

CBOE crude oil market volatility index and Brent futures prices (Source: Refinitiv Eikon Thomson Reuters)

Recent efforts by OPEC and allies, which might not be working in the short-term, has now somewhat induced a fear related to the supply, which could be inferred from the U-turn witnessed in the CBOE crude market volatility index.

The CBOE crude market volatility index usually moves opposite to the crude oil prices, but in the recent past (May-end) it has witnessed a slight spike in the direction of the price trend, and it is again turning upward towards the price direction, suggesting that the market has now somewhat started factoring the supply curtail by OPEC and allies.

Impact on ASX-Listed Oil & Gas Stocks

ASX-listed oil & gas stocks such as Woodside Petroleum Limited (ASX:WPL), Oil Search Limited (ASX:OSH), Origin Energy Limited (ASX:ORG) are showing similar chart patterns of a recovery rally followed by a breakaway gap down due to the sudden decline in crude oil prices.

Woodside Petroleum Limited (ASX:WPL)

After rallying from its recent low of $14.930 (intraday low on 23 March 2020) to the level of $24.740 (intraday high on 9 July 2020), which marked a price rally of ~ 65.70 per cent, the stock came under pressure and traded in a negative zone for two consecutive trading session, and gave a breakaway gap down of ~ 5.14 per cent to bypass the short-term support trendline, and close the session at $21.370, down by 5.27 per cent against its previous close on ASX.

Many of the other ASX-listed such as Origin Energy and Oil Search followed the same trajectory to close at $5.740, down by 4.01 per cent against its previous close on the exchange, and at $3.290, down by 5.73 per cent against its previous close on ASX, respectively on 12 June 2020.

In a nutshell, while OPEC and allies are trimming the production and promising partners that it would take all relevant measures to bring stability in the oil market, market participants are closely responding to the demand factor, leading to a price fall in ASX-listed oil & gas stocks.

The sudden build up in the U.S. commercial crude oil inventory along with the Fed’s outlook on the domestic oil has once again brought the demand outlook as the agenda behind the crude oil market movement; however, considering the recent U-turn (small) in the CBOE crude oil volatility index, it could be inferred that though the supply fears are not playing the major card on the table, the market is somewhat factoring the OPEC’s measures to address the supply glut.

 

 


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