One of the most devastated sectors from the novel coronavirus pandemic has been the oil markets. With the price of “black gold” at one point dropping below zero, you can imagine that even the big players like Exxon Mobil (NYSE:XOM) were having a rough time. However, with the U.S. economy reopening, Exxon Mobil stock has finally enjoyed significant upside momentum.
Truly, it’s a dramatic turnaround. At the start of the year, XOM was trading hands at just under $70. But during the worst of the crisis, Exxon Mobil stock hit a low of $29.54. From that comparison, shares are now up 58%. Moreover, a pair of surprisingly positive economic data points – the May jobs report and retail sales – lend credence to the bullish narrative.
However, it’s also fair to point out that Exxon Mobil stock is down about 32% for the year. This is approximately in line with the year-to-date performances of West Texas Intermediate and Brent Crude. To justify buying shares at these levels, you’d imagine demand has to be just as robust.
But that’s not quite what we’re seeing. According to TomTom.com’s automotive traffic index, Los Angeles congestion is down 63% from the year-ago level. In Beijing, China, congestion is down 68% against 2019 levels, after improving to being down 29% a few weeks ago.
The other big transportation market is the airliners. During the depths of the pandemic, airline passenger volume came to a screeching halt. Now, they’ve picked up significantly. For example, on June 22, the Transportation Security Administration reported 607,540 people passed through its screening checks. That’s the largest single-day passenger volume since April, but overall, volume is down 78% year-over-year.
Exxon Mobil Stock to Soon Face a Two-Front Battle
At its present price threshold, XOM is balanced somewhat precariously between bulls and bears. On one hand, you have the recovery narrative which has lifted most investment sectors. But on the other, we’re far from declaring victory with any confidence.
Moving forward, I see two main risks with Exxon Mobil stock. First, the demand issue – which I discussed above – is problematic. In my opinion, it seems that XOM and rivals, such as Chevron (NYSE:CVX) and BP (NYSE:BP), have moved ahead of their fundamentals. For instance, if traffic levels in major global metropolitan areas are down more than 60%, does that justify oil prices being down “only” 35%?
Clearly, Wall Street believes that demand (i.e. gasoline for cars, jet fuel for airplanes) will pick back up; hence, the strong rally in Exxon Mobil stock. But if for some reason things don’t turn out that way – let’s say the coronavirus strikes again – XOM could fall in a hurry.
But the other risk factor for Exxon Mobil stock may be a surprising one: the nuances behind the new normal economy.
To understand this point, one of the justifications for buying equities now is that the labor market may not be nearly as bad as you might think. Of course, millions are unemployed, but what kind of jobs did the recently jobless hold?
When you look at unemployment for college-educated workers, it never hit double digits during this crisis. Theoretically, this should bolster Exxon Mobil stock. Basically, the people that can afford Exxon’s products have been insulated from the troubles.
However, these are the same people that are working remotely. While I don’t want to inject my own anecdotal experience, I think it’s relevant here: I don’t remember the last time I pumped gasoline.
A New Culture Means Big Changes for Oil
Supposedly, my car should get me 23 miles to the gallon. The way I drive, it’s probably more like 12. Strange how a twin-turbo setup will do that to you.
But anyways, here’s my point – at a time when people should be out celebrating cheap gasoline, they’re staying in. To me, this is an indication that the new normal isn’t just a means to practice mitigation protocols. Rather, we have embraced a new culture.
From both our personal lives to our professional ones, everything is about remote, contactless deliveries of products and services. That’s great for us but terrible for Exxon Mobil stock. Remember that e-commerce firms like Amazon (NASDAQ:AMZN) are rapidly upgrading their delivery fleet to incorporate cleaner energy.
Also, corporate America is beginning to love the new normal. If businesses can get work done via remote employees – or better yet, independent contractors – they don’t have to spend so much on physical infrastructure. It’s all in the name of contactless, which doesn’t bode well for oil companies.
Of course, I don’t expect XOM to go to zero. It’s a massive energy company that will adapt to whatever changes come its way. But until then, there’s a possibility for at least another significant downturn.
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.
