Presently, the oil market is giving you a case of good news and bad news, depending on your perspective. If you’re in the market to buying a new or used car, you’re living a charmed life. On the other hand, if you’re deeply invested in oil firms like BP (NYSE:BP), you should consider an exit plan. Almost every indicator suggests that BP stock will face extreme turbulence.
Please don’t misread this as me being specifically negative toward the company. Whether you’re talking about the majors like Exxon Mobil (NYSE:XOM) or the soon-to-be dearly departed Chesapeake Energy (NYSE:CHK), this sector is among the ugliest. And nothing special exists about BP stock that would cause me to offer a contrarian opinion.
Primarily, I’m very concerned about the implications of recent volatile trading in the oil markets. On Monday, everyone was talking about the May futures contract dipping below zero. Theoretically, that means people would pay money not to receive oil – an absurdity in any other paradigm.
Of course, the futures market is much more nuanced than that. However, there was nothing nuanced about Tuesday’s session as oil prices tumbled to a 21-year low. What this tells us is that we should throw out all expectations for a quick V-shaped recovery. And if that’s the case, you don’t want to hold BP stock because it will more than likely fall further.
While various countries have forwarded alternative and green energy solutions, the vast majority of the global economic engine runs on fossil fuels. Given that understanding, you cannot interpret the destruction of oil market value in any other way besides extremely negatively.
That is, unless you want to buy a car.
Auto Buyers Rejoice While BP Sinks
Recently, Cnet.com wrote an article that the novel coronavirus eliminated 10% of value from your car. Below, I will demonstrate that this is a rational – and perhaps very conservative – markdown.
According to data from the Board of Governors of the Federal Reserve System, automobile loans from all commercial banks totaled $456.43 billion on April 8. This represents a 0.52% loss over a two-week period.
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Without context, this dip doesn’t seem like such a big deal. But since January of 2015, this is the biggest two-week loss of auto loan value. Furthermore, as we collect more data, the numbers will surely worsen. After all, our economy is getting sicker with the shutdowns, particularly in our powerhouse states like California and New York.
At some point, though, auto sales will normalize. But they will likely normalize to the free market equilibrium for auto loans as opposed to our recent highs. I define equilibrium as the auto loan figure where most consumer activity occurs, which is between $421 billion to $423 billion.
For simplicity’s sake, let’s use $422 billion as the equilibrium. This is 8% lower than the most recent high in auto loans, which was valued at $458.81 billion on March 25. Thus, Cnet.com is reasonable when they reported a 10% market value loss of your car.
But if that’s the case, BP stock and its ilk are in trouble. Without consumers buying new cars, the incentive for buying gasoline goes down the drain. Of course, it’s much worse than that. Consumers aren’t buying cars because there’s really no point right now. And that translates to huge demand downfalls for the oil industry.
However, if you’re buying a car, you’re in the driver’s seat. Remember that 10% is your baseline negotiation figure.
Where Will the New Normal End Up for BP Stock?
I say baseline because a 10% discount off the pre-coronavirus sticker price is the most you should pay. Potentially, you can drive down the sticker price even lower.
Above, I mentioned that the $422 billion auto loan value represents the equilibrium range. However, that was what the free market determined as a viable threshold in the pre-coronavirus era. In the post-pandemic phase, that loan value could be much, much lower.
Frankly, I wouldn’t be surprised if commercial banks only loaned out on average $350 billion or less. Because remember, this new paradigm assumes that approximately 30 million people will be without jobs for quite some time. Amid this destitution, auto dealers will look for whatever money they can grab, which won’t be much.
During this time, who knows how low BP stock can go? Again, with millions out of work and entire state economies devastated, what other scenarios exist?
Therefore, the winners in this crisis are few, expect for lucky car buyers. My advice? Drive a really hard bargain, starting at a 40% discount, referencing the information in this article. If they balk, just tell ‘em you’ll walk. You have so many options it’s unbelievable.
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.
