The last time I weighed in on Exxon Mobil (NYSE:XOM), I said it was not time to buy Exxon Mobil stock.
Sure, the shares are trying to bounce off multi-year lows, and oil prices are attempting to stabilize from negative territory. Unfortunately, neither effort will last long.
Both Exxon Mobil stock and oil are heading lower because there’s no demand for oil and far too much supply of the commodity.
In fact, with the coronavirus keeping most of us indoors, demand for oil is nearly non-existent. As a result, we’re seeing a considerable buildup of supply with no place to store all of it. Worse, “traders are storing an estimated record 160 million barrels of oil on ships – double the level from two weeks ago as they seek to tackle a glut of stocks created by a slide in global demand from the coronavirus,” Reuters recently reported.
Due to the glut, oil prices will drop lower, dragging oil stocks like Exxon Mobil down further.
As a result, in my opinion, it’s best to avoid Exxon’s shares at the moment.
The World Has Run Out of Room to Store Oil
“The worldwide economic shutdown has diminished demand so significantly that we are running out of room to store crude oil,” said Gregory Leo, chief investment officer and head of global wealth management at IDB Bank. “The math is pretty simple. Current oil production is about 90 million barrels per day, but demand is only 75 million barrels per day.”
Unfortunately, the recent deal involving OPEC and other oil-supplying nation won’t help much.
While the deal is supposed to result in supply being cut by 10 million barrels per day starting on May 1, the supply cut will begin to taper off in June. By the end of the year, supplies are supposed to be 7.7 million barrels per day below their April levels. However, that’s not enough. Even Goldman Sachs has said, “it’s nowhere near enough.” In fact, it’s laughable.
Oil’s Rally Was Temporary
Granted, oil prices rose on Wednesday and Thursday, but don’t get your hopes up for further gains.
It’s true that there are hints that OPEC could make further supply cuts.
“Majid bin Abdullah Al-Qasabi pointed out that the Cabinet discussed the Kingdom’s keenness to achieve stability in the oil market, its affirmation with the Russian Federation of a firm commitment to implement agreed targeted cuts over the next two years, their continuing monitoring of oil market situations closely, and being prepared to take further measures jointly with OPEC+ and other producers,” as highlighted by the Saudi Press Agency.
And tension between the U.S. and Iran is brewing again. Specifically, President Trump tweeted, “I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.”
But don’t expect to see the smoke turn into fire. We’ve had multiple run-ins with Iran and most don’t last too long.
Further, for oil to push higher, demand has to rise and supply has to drop meaningfully. Both will happen once the coronavirus threat begins to die off. OPEC could help by further reducing its oil output, but it just doesn’t seem to care very much about low oil prices.
Negative $100 Per Barrel Oil is Possible
What makes the situation even more interesting is the possibility of -$100 per barrel oil. “We have clearly gone to a full-scale, day-to-day market management crisis,” said Mizuho Bank oil industry analyst Paul Sankey. “Will we hit negative $100 a barrel next month? Quite possibly.”
The reason for that is simple: there is a shortage of oil storage facilities.
At the moment, there are more than 130 million barrels of oil floating in vessels in the world’s oceans. That’s because producers are still pumping out oil.
Cushin, America’s main oil storage facility, may be full by next month. Sadly, you can’t even give away oil these days. No one wants it.
Avoid Exxon Mobil Stock
In short, buying a stock like Exxon Mobil based on hope isn’t a great idea. Exxon’s stock is likely to plunge below its recent low of $30.11 as oil prices plummet further. As a result, It’s best to just stay away from Exxon’s shares.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
