Universally, the novel coronavirus pandemic has represented a vicious headwind. Even for companies that have benefitted from the “new normal” – grocers and gun stores come to mind – the uncertainty of tomorrow weighs heavily on all. However, for oil giant Exxon Mobil (NYSE:XOM), Covid-19 was the last thing it needed. Prior to this mess, Exxon Mobil stock wasn’t looking too hot. Now, it’s clinging for dear life.
One of the biggest challenges of the outbreak is its multi-thronged blade. It’s already bad enough that economies throughout the world have been put on hold. But exacerbating this tenuous circumstance is the oil price war between Saudi Arabia and Russia. To counteract the sudden loss in demand for fossil-fuel energy sources, the Saudis proposed mutual production cuts. Unfortunately, the Russians balked at the idea, wanting to protect their own interests instead of joining a multinational coalition.
Obviously, this angered the Saudis, prompting them to go the other way and unleash a torrent of oil. As expected, the high-level retaliatory actions plummeted prices, causing the U.S. – a major exporter in its own right – to intervene. According to the Washington Post, we could see a deal shortly. Theoretically, this should bolster the incredibly beleaguered Exxon Mobil stock.
Nevertheless, investors shouldn’t get too complacent. Although the conflict is between the Saudis and Russians, the two don’t necessarily have much love for the U.S. either. After all, we’re now competitors in the oil exporting scene. Further, President Donald Trump has not signaled a willingness to participate in cooperative production cuts.
I’m no geopolitical expert, but I’m pretty sure that neither the Saudis nor the Russians like that idea, clouding the case for Exxon Mobil stock.
Exxon Mobil Stock Has Several Mountains to Climb
To be fair, Russia has a much more diversified economy than Saudi Arabia. Additionally, years of U.S-backed sanctions against Russia has isolated their economy. On one hand, that denies broader growth channels. But on the other hand, the Russians are more insulated from global turmoil.
Then you have the fact that the Saudis depend on oil exports more so than their rivals. At some point, you expect the Saudis to relent.
Even so, what would that really do for Exxon Mobil stock? Another consequence of the coronavirus pandemic is that because of the oil demand disruption, the world has more oil than they know what to do with. Thus, the New York Times recently argued that the present risk is no longer peak oil, but rather peak storage.
Let’s go a step further and assume that magically, all the supply challenges disappeared overnight. You’re still left with the more critical headwind against Exxon Mobil stock: a historic erosion of demand. Principally, the evaporation of vehicle sales in March presents an unparalleled crisis.
To illustrate just how we’ve fallen, I created a scatterplot analysis comparing total vehicle sales in the U.S. against those sales’ monthly rate of change. The timeline is between January 2010 through March 2020.
Click to Enlarge
As you can see, vehicle transaction activity is mostly concentrated between 17 million to 18 million vehicles sold (x-axis) and plus/minus 10% monthly change (y-axis). The streak of activity that’s moving left to right in the direction of the mass concentration point represent sales in the wake of the Great Recession.
But that dot on the lower left corner of the chart? That’s where we are right now. It confirms that vehicle sales have almost fallen off the map. And that really hurts Exxon Mobil stock.
Don’t Let Your Guard Down
Again, to be fair, the 32% loss in vehicle unit sales from February to March is not an all-time record loss. That dubious honor occurred in September 2009, which saw an over 35% loss. However, we’re not that far behind.
Moreover, the September 2009 transaction was more of a mathematical anomaly. At the time, Americans witnessed the implosion of the housing and stock market bubble. And with prices for all consumer goods in the doldrums, some folks who had money saved took advantage of the discounts.
Today, the situation is completely different. Prior to the pandemic, the markets were moving strongly into the new year based off positive developments in U.S.-China relations. When the virus hit us, it ripped everything apart. Suddenly, we went from multi-year lows in unemployment to facing the prospects of staggering job losses.
Therefore, I’m skeptical about Exxon Mobil stock. Sure, a possible cooling in Saudi-Russian tensions will help boost shares in the near term. But until we can figure out how to repair the multi-trillion-dollar hole in our economy, I’m taking a pass on energy stocks.
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.
