When it comes to shares of Exxon Mobil (NYSE:XOM), it’s all about the market price of oil. When oil prices plunge — like they did in 2015-16 amid escalating supply and slowing demand -= XOM stock plunges, too. Conversely, when oil prices rise — like they did through the first few months of 2019 amid stabilizing demand and potential production cuts — XOM stock rises, too.
As such, you should buy XOM stock when the outlook is for oil prices to rise in the foreseeable future. At the same time, you should avoid XOM stock when the outlook is for oil prices to fall.
Unfortunately, at the current moment, the outlook for oil isn’t too rosy. Supply is coming into the market at a record rate, and demand is being challenged by rising geopolitical tensions and adverse secular consumption trends. That combination ultimately implies that the most likely path forward for the price of oil is down.
If correct, then that means the most likely path forward for XOM stock is lower, too. That’s why I’m avoiding XOM stock until the outlook for oil improves.
As Goes Oil, So Goes Exxon Mobil Stock
The XOM stock-oil price correlation isn’t perfect, but it’s pretty close. Just look at the chart below which layers XOM stock price on top of the WTI crude oil spot price over the past decade.
As oil prices rebounded from their 2008 financial melt-down lows into the end of 2014, XOM stock similarly rallied from under $60, to above $100. Then, when oil prices tumbled throughout 2015 and into early 2016, XOM stock dropped from over $100, to $70. Oil prices rebounded in 2016, and XOM stock bounced back to nearly $100 again.
To be sure, oil prices stayed in rally mode into 2018, but XOM stock failed to rally alongside rising crude prices because the stock was priced for oil to get back to its 2014 highs (they never did). Now, in 2019, as oil prices have risen and subsequently dropped, XOM stock has risen and subsequently dropped, too.
In other words, over the past decade, Exxon Mobil’s stock price has consistently tracked the price of oil, with one major exception (late 2016 to late 2018), and that was when XOM stock got ahead of itself and gains in oil remained sluggish.
Importantly, over the past 10 years, Exxon Mobil stock has never staged a sustainable rally when oil prices were falling.
Oil’s Outlook Isn’t Great
At the moment, the outlook for oil prices is to keep falling for the foreseeable future.
The price of oil — as with the price of any other asset or commodity — is determined by supply and demand. High supply plus low demand equals low prices. Low supply plus high demand equals high prices.
On the supply side, the oil market is being flooded with new supply. U.S. oil output has been very strong this year. So has emerging market oil output. The result is that oil supply outstripped oil demand by 900,000 barrels per day in the first half of 2019, according to IEA. Thus, this market has high supply.
Meanwhile, on the demand side, the global economy is heading into what many see as a manufacturing recession. The oil market gets a lot of demand from the manufacturing sector. So, as global manufacturing cools down, a major portion of the oil market’s demand will remain weak. At the same time, electric vehicle adoption trends globally have accelerated in 2019, and that provides an additional demand headwind here. Simply put, the market has depressed demand.
High supply and suppressed demand create an unfavorable outlook for the oil market going forward.
Bottom Line on XOM Stock
Over the past decade, XOM stock has never staged a sustainable and sizable rally against the backdrop of falling oil prices. Unfortunately, the outlook over the next several months is for oil prices to fall. As such, it is highly unlikely that XOM stock heads higher anytime soon.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
