Favorable Oil, Macro Trends Will Boost Exxon

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When I last wrote about Exxon Mobil (NYSE: XOM), in a column published on April 16,  I predicted that Exxon Mobil stock would rise as states opened up their economies. That phenomenon has indeed played out as I expected.

Favorable Oil, Macro Trends Will Boost Exxon Mobil Stock
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Specifically, many states greatly curtailed their lockdowns, causing gasoline demand to climb.  Also boosting oil prices is the fact that the economies of much of Europe and of China are also being opened up.

And as Exxon CEO Darren Woods explained on the company’s first-quarter earnings conference call, held on May 1,  “There are some encouraging early signs in the transportation sector, particularly road transportation.”

Moreover, Jamie Webster, senior director of Boston Consulting Group’s Center for Energy Impact recently said, “Demand is clearly coming back, with multiple indicators showing positive signals as economies begin to open up.”

Meanwhile, oil supplies have dropped. That’s because many large energy companies, including Exxon, are reducing their petroleum output, while many countries also lowered their oil production.

Unsurprisingly, oil prices have climbed in recent weeks, with the price of West Texas Intermediate surging from $10 on April 20 to nearly $25 on May 9. And Exxon Mobil stock has followed suit,  climbing from $41 on April 16 to $46 on May 8.

Positive Trends Are Likely to Intensify

As the lockdowns are relaxed further, I expect gasoline demand to continue to surge in the next month or two, lifting oil prices and Exxon’s shares in the process. On the demand side, the trend of states loosening their lockdowns isn’t going to stop and will probably accelerate.

Many states led by Republican governors, including Texas, Arizona, and Georgia, are moving quickly towards full reopenings.

Meanwhile, leaders are coming under increasing pressure to ease their lockdowns. In states led by very cautious governors, protests continue to erupt. In Pennsylvania and California, multiple counties are refusing to enforce lockdown orders. And in Dallas, a hair salon owner very publicly defied a closure order.

As large states like Georgia, Florida, and Texas open up fully or nearly fully without experiencing disasters, while fears of the virus continue to drop, those types of pressures on the hard-line leaders will only intensify. As a result, I predict that, by mid-June, the vast majority of the country will be mostly or fully opened. Consequently, oil prices will climb further, meaningfully boosting Exxon’s shares.

The Dividend Yield and the Longer Term Outlook

Given Exxon’s vast financial resources, its meaningful spending cuts, and the fact that oil prices are already rebounding and are likely to continue to do so for some time, the company and its dividend are safe. In other words, Exxon is not going to declare bankruptcy and it’s not going to cut its dividend. Consequently, those who buy the shares now can lock in a huge annual dividend yield of 7.6%.

Meanwhile, I think the macro economic picture for 2021 is actually shaping up to be fairly strong. There’s a good chance that we’ll have a vaccine for the coronavirus by then.

And even if there’s no vaccine, the virus is likely to be meaningfully weaker, many people will probably be immune to it, and we’ll have multiple drugs that can tremendously blunt its deadliness.  Additionally, there will be a large amount of pent-up demand for oil, as hundreds of millions of people globally who were afraid to travel in 2020 decide to do so in 2021. Finally, the economic stimulus provided by central banks and governments will still have an impact, while oil supplies will still probably be well below 2019 levels.

Add it all up, and Exxon Mobil stock looks poised to deliver strong returns for those who buy the shares now and hold them well into 2021.

The Bottom Line on Exxon Mobil Stock

In the near term and medium term, the shares should rise due to favorable oil supply and demand trends. Over the long term, investors will benefit from the shares’ large dividend yield and a strong macro economic rebound in 2021.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.  As of this writing, he did not hold a position in any of the aforementioned securities.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/favorable-oil-macro-trends-will-boost-exxon/.

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