For most companies, the coronavirus from China represents a nasty black swan event. Few organizations, though, are as negatively impacted as Exxon Mobil (NYSE:XOM). Obviously, as a traditional energy giant, XOM stock is tied to oil demand. And that has simply fallen off a cliff, with no great indicators that it will rebound anytime soon.
As you might expect, member states of the Organization of the Petroleum Exporting Countries (OPEC) are scrambling for emergency measures. This is about as hard of a hard stop as you can get. Once health authorities failed to contain the coronavirus within China’s borders, it was inevitable that it would cross international communities.
Even more bad news for XOM stock, whatever OPEC does may be too little, too late. In a CNN Business report, research firm IHS Markit anguished that “oil demand will suffer its steepest decline on record in the first quarter — worse even than during the 2008 global financial crisis — as schools and offices close, airlines cancel flights worldwide and a growing number of people hunker down at home.”
If that wasn’t enough of a stark message, IHS Markit lamented an “unprecedented stoppage” of economic activity in China. That’s significant for XOM stock, along with rival offerings from fellow oil giants like Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) because China’s ravenous appetite for energy – in its bid for economic supremacy – bolstered the industry.
Without China, few other places can pick up the slack. And even those countries are shuttering down. Japan and now Italy have closed schools in an extraordinary bid to stem the tide.
Is the coronavirus just like the “regular” flu? I don’t think so.
The Long, Long-Term Case for XOM Stock
Despite so many headwinds facing the oil industry, its well-heeled contenders like Exxon Mobil offer a contrarian case. However, it will not be an easy one.
First, oil prices started rising early Thursday ahead of a key OPEC meeting. In it, experts anticipate that Saudi Arabia will push the group and its allies, particularly Russia into supporting production cuts. Adding to the enthusiasm that such measures could work is that U.S. oil inventories increased to lower-than-expected levels.
Admittedly, it’s hard to gauge the viability of such actions. For example, global central banks, including the U.S. Federal Reserve pledged or acted on supportive fiscal measures to mixed results. However, it’s a positive for XOM stock, if only that there are so few available right now.
Second and more importantly, oil remains a profound necessity in global societies and economies. Sure, many experts predict a dramatic paradigm shift in the automotive landscape, forecasting an electric future, perhaps by 2040. I’m skeptical because electric cars have a physics problem that combustion-engine cars do not.
I concede that in terms of efficiency – and actually, several other metrics – EVs win hands down. However, combustion works practically everywhere: it’s much easier to transport gallons of gasoline than a 1,054-pound battery pack needed to power a Tesla (NASDAQ:TSLA) Model 3.
As well, our transportation infrastructure is geared towards oil-based products. While technologies have improved to reduce “range anxiety” in EVs, the lack of charging stations outside of major metropolitan areas essentially limits EVs to urban use. On the other hand, regular cars don’t have that problem.
Moreover, oil fuels every other transportation platform from airplanes to container ships. That, despite many innovations, will have a long way to go from changing.
How to Approach Exxon Shares
Still, the overhang here is the time impact of the coronavirus. If history is any guide, we need at least a few months to understand the scope of this microbiological threat. The worry, though, is that the coronavirus has rendered so much devastation in a little over two months.
Plus, the bigger economic threat is that because oil is so ingrained in our societies, it may be a harbinger. While the Dow Jones is down 5.4% for the year, XOM stock is off 24.3%. Unlike the Dow, oil prices don’t have a Fed to mask the demand weakness. As OPEC may soon find out, demand is demand: there’s no way to fake whether people want the product or not.
Given this new reality that has been thrust upon us, I think the smarter play tactically is to wait. XOM stock looks very ugly from a technical perspective. A little patience to see how this plays out will certainly be better for your blood pressure.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
