Several decades from now, historians may view this moment as the mother of all black swans. Because within the novel-coronavirus-led global economic downturn came other events that I previously imagined were unthinkable. First, Saudi Arabia and Russia engaged in a protracted oil price war. Later, the two agreed to an unprecedented oil production cut, helped in part by President Donald Trump. And despite the obviously positive implications for Marathon Oil (NYSE:MRO), I’m still skeptical of MRO stock.
But first, let’s acknowledge that in the near term, we could see the oil markets enjoy some positive sentiment from speculators. It’s not just that the scope is unprecedented. According to CNBC, the agreed-to production cut of 9.7 million barrels per day by the so-called “OPEC+” nations is the biggest such cut in history. Rather, it’s that the deal appeared to fall through, with Mexico not happy with initial calls for it to cut 400,000 barrels per day.
Fortunately for the fossil-fuel-related energy industry, the involved nations were able to work out a deal. However, I believe this is where the good news ends for MRO stock.
Upon the closure of the OPEC+ deal, President Trump gloated on Twitter (NYSE:TWTR) that “This will save hundreds of thousands of energy jobs in the United States.” That may be the case but only for energy’s big boys, like Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX). Even then, these giants will face substantial challenges.
More importantly, you shouldn’t use President Trump’s tweets as a signal to buy MRO stock. Obviously, the man is in an election year. Further, Marathon Oil was an embattled organization prior to the coronavirus pandemic, meaning it’s no better today.
Supply Is Just One Equation for MRO Stock
Admittedly, I didn’t think that the Saudis and the Russians would see eye to eye. Frankly, the leaders of both countries are egomaniacs. I’d say more but I like my body parts attached to my body. In a battle of wills, I interpreted the situation as a conflict neither could afford to lose.
Thus, I personally forecasted a long, protracted struggle. I was wrong, at least for now. Who knows what can happen in this mess?
But in my view, it really doesn’t matter. That’s because for investments like MRO stock, supply is just one part of the equation. Moreover, it’s the least important part. What really matters is demand. Here, the economy has provided zero evidence for optimism.
Lately, I’ve been having a love-hate affair with Trump. But when he stated that the OPEC+ deal will save “hundreds of thousands” of U.S. energy jobs, I laughed. Honestly, it’s something I’ve said multiple times before: oil producers can completely choke off their production. If nobody wants to buy the product, the price will eventually deflate.
Obviously, one of the biggest headwinds for investments like MRO stock is the employment picture. Over the past three weeks, nearly 17 million Americans filed for unemployment benefits. As you know, this figure is likely understated. Millions across the nation have attempted to acquire critical benefits, only to be denied due to administrative capacity failures.
Therefore, it truly doesn’t matter what the price of gasoline is. As another CNBC report stated, gas prices are at multi-year lows, “but no one is driving.”
Theoretically, reduced supply will lift prices due to the scarcity effect. But this measure is insulting, considering that job losses will likely worsen over the next several weeks.
We Could All Be Facing a Greater Depression
Several analysts have compared the current crisis to the last big slowdown, the so-called Great Recession. However, the more I analyze historical data, the more I believe the Great Depression provides the best analogy.
In terms of relevance to our modern times, obviously, the former period offers a recognizable platform. But keep in mind that prior to the 2008 global financial crisis, signs flashed that not all was well. For instance, 2007 was not a great year in the U.S. stock market. And consumer sentiment data progressively weakened over a two-year period heading into the October 2008 crash.
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Contrast that dynamic with the Great Depression. Up until the markets crashed, Americans were celebrating the Roaring Twenties. The destruction of equity value, much like the coronavirus’ impact, came as a paradigm-shattering shock to the U.S.
Worryingly, it took well over two decades for the markets to return to prior highs. While I’m not suggesting a repeat, what I am saying is that we shouldn’t assume a quick V-shaped economic recovery. Unfortunately, that’s exactly what MRO stock needs, which is why I’m not convinced on the underlying company.
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.
