Despite the terrible impact of the novel coronavirus, it’s also been almost a year since Americans have struggled with this pandemic. As a result, many on Wall Street are anticipating an eventual recovery. After all, no virus outbreak has ever broken the will of human resilience. Therefore, even deeply embattled names like Exxon Mobil (NYSE:XOM) may soon benefit on this rebound narrative. And as XOM stock ticks lower, contrarians might be licking their lips.
To be clear, I generally don’t like oil stocks so long as Covid-19 imposes a dark cloud on our economy. Sure, some oil companies might be tempting ideas for short-term trades. Furthermore, not all contenders in this space are built equally. However, with new daily coronavirus cases rising per the Centers for Disease Control and Prevention, it’s difficult to understand what the appeal for XOM stock is.
At the same time, I let the facts speak for themselves. One of those facts is that the Covid-19 pandemic hasn’t had the influence on oil prices as you would intuitively assume. From the beginning of June of this year through Oct. 19, West Texas Intermediate and new coronavirus cases share a 50.5% correlation coefficient. Though not the strongest magnitude of correlation, this roughly indicates that as Covid infections increase, so too does the oil price.
Fundamentally, this doesn’t make sense. Higher infections, especially the record-breaking ones that we saw over the weekend, would justify calls for more mitigation measures, if not lockdowns as we’re seeing in many European countries trying to stem the tide of their second wave. Of course, that would be terrible for XOM stock.
But as Oilprice.com contributor Tsvetana Paraskova argues, the “oil market has already priced in the slowing global demand recovery and the growing uncertainties about the economy amid resurging coronavirus cases in many parts of the world.” If so, XOM stock could be a brilliant contrarian buy, especially if coronavirus cases fade away.
However, I remain unconvinced — and here’s why.
XOM Stock Can’t Conjure Up Demand
First, Paraskova’s article was published on Oct. 7. Back then, the seven-day moving average of daily coronavirus cases was just under 50,000. Now, the moving average jumped is up to nearly 75,000. Unless we have a sudden change of heart in mitigation efforts, we will probably suffer a second wave. And that scenario is further complicated by the upcoming U.S. presidential election.
To be fair, you never want to count out President Donald Trump and his legions of loyal supporters. However, we’ve got to be realistic and note that it’s probably unlikely that the polls will be off again in 2020. That may mean a Joe Biden victory, which could translate into stricter containment measures if the pandemic extends into 2021.
Since Europe is already in that strict containment mode, and we’re on the cusp of it, the oil market’s economy is about to shrink substantially. Of course, that’s not great for XOM stock.
But even without the threat of political headwinds, Exxon Mobil isn’t out of the woods. In my opinion, we’re not even close to having that discussion. It really boils down to consumer demand destruction.
According to the Bureau of Transportation Statistics, trips of one to 25-mile distances have declined 36% in the week beginning Oct. 11 relative to the year-ago level. Furthermore, travel demand in this category is at the same level it was on the week beginning April 19. Thus, until people want to travel more, I don’t see XOM stock recovering meaningfully.
The exception to the loss of travel sentiment has been longer trips. As you know, sales of recreational vehicles increased dramatically during this pandemic because it’s one of the few vacation platforms that feature inherent social distancing. Yet, the BTS reports that trips longer than 100 miles have been sharply deteriorating since the week of Aug. 16.
Moreover, it’s no surprise that domestic commercial flights have been basically flat since July. Otherwise, the airliners wouldn’t have gutted their workforce. Plus, with Covid-19 cases on the rise, there’s even less incentive to board a plane with strangers.
What to Make of Oil’s Strange Relationship with Covid?
Having said all that, the direct relationship between coronavirus cases and the oil price is even more perplexing. Can this correlation last, justifying the contrarian argument for XOM stock?
Frankly, I don’t think it will. Although oil prices have been hanging on for roughly the last month-and-a-half period, Exxon Mobil stock has been decidedly negative. Previously, I believe that Wall Street anticipated that a push for Covid-19 therapeutics and vaccines would spark a recovery. Currently, that thesis seems to be under fire, especially against the nearer-term context.
As well, XOM stock doesn’t have convincing upside arguments, only negative ones. Even if Covid-19 magically disappeared, the economic damage has been done. Permanent job losses have been accelerating, which doesn’t bode well for oil consumption.
However, there’s a realistic case for the Covid-19 crisis to worsen. For instance, CNBC issued a report stating that this pandemic could become an endemic. In that case, the work-from-home transition could be at least a semi-permanent fixture of society. Again, that wouldn’t be helpful for XOM.
So, while the price point for Exxon Mobil is attractive, there are too many negative variables. With this latest surge in Covid cases, I’d stay away for now.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.