Perhaps the most powerful representation of the novel coronavirus pandemic’s destructiveness came from the oil market. Earlier this year, prices for barrels of crude dipped into negative territory – it made more sense to pay not to take delivery, which of course made no sense at all. Therefore, it’s no surprise that Exxon Mobil (NYSE:XOM) suffered badly during this year. But bad times don’t always last forever – will this fact help XOM stock?
Certainly, I can appreciate that it’s tempting to dive into big oil right now. Yes, political pressure, especially with the transition in power, is a darkening cloud hanging over XOM stock, as well as rivals like Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP).
However, the Democrats will not be able to overturn the fossil fuel industry overnight. And in the race to go green, we will need “interim” energy sources to help us complete the ultimate transition.
Essentially, this means XOM stock has a long pathway of business viability. But in the nearer term, Americans are tired of being cooped up at home. Further, various state and local government officials are stuck between a rock and a hard place.
Optically and morally, they can’t let their constituents die amid a still mysterious health threat. Simultaneously, forcing lockdown measures will almost surely cripple small businesses, the backbone of America’s economy.
To that effect, I’m sure I’m not the only one who has witnessed a rise in automotive traffic. In addition, the airliner industry is enjoying some encouraging data. According to the Transportation Security Administration, over one million passengers went through airport checkpoints on Nov. 22, which is approximately 45% of the year-ago level.
To be sure, we still have a long way to go. Finally, though, the consumer travel industry appears to be on a recovery trek, which bodes well for XOM stock. Nevertheless, this may be a sell into strength opportunity rather than a true mending signal.
XOM Stock Working Against Major Headwinds
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To appreciate where we are in the oil market, we must separate the noise that you see in the day-to-day price fluctuations from broader economic trends.
If we perform this exercise, it appears more likely that XOM stock is benefiting from a return to normalcy in the political realm rather than a factor related to underlying business strength.
To demonstrate this, I broke down historical spot oil prices for the West Texas Intermediate index in five-year intervals. Roughly speaking, the oil market experiences generational phases (about 15 to 20 years) that transition from growth to consolidation back to growth. If you believe in the cyclical nature of the stock market and the commodities sector, this analysis should be familiar to you. To summarize:
- The period between the 1970s to the mid-1980s was characterized by quick and robust growth in the oil market.
- From the mid-80s throughout the 1990s, oil experienced a long consolidation phase.
- Then, from the 2000s to the oil price deflation event around the middle of last decade, oil again saw tremendous growth.
If we follow the logic of this pattern, we should expect the next generation to be one of consolidation. Interestingly, oil prices were already correcting from their highs before the novel coronavirus pandemic. It’s just that the crisis accelerated the negativity, perhaps a little quicker than it “deserved.”
In this context, we shouldn’t be shocked that XOM stock is jumping higher in recent sessions. Again, the push for clean energy is strong but it won’t spark an overnight paradigm shift. For instance, we still have overwhelmingly more combustion-engine cars on the road than we do electric vehicles.
However, my hesitation toward XOM stock is that shares are fighting against broader market trends. Sure, we have promising vaccines on the cusp of approval. But because of the seismic transition that society has made to combat Covid-19, it’s entirely possible that less travel will occur during typical rush hour zones, even post-pandemic.
That would apply significant pressure on the oil industry, which would make Exxon Mobil a good investment for now – not a good investment period.
Signs of Consumer Confidence Fracturing
Another reason that keeps me away from the oil sector is that some of the positive movements could be relying on lagging data. However, the most recent data from the Bureau of Transportation Statistics indicates that rising coronavirus cases are having a negative impact on consumer sentiment.
Primarily, the number of people who are staying home increased nearly 9% between the week beginning Oct. 25 and Nov. 1. Also, during the same period, the number of trips taken between 25 to 100 miles declined 1.1%. This suggests that people are concerned about soaring Covid-19 cases. Therefore, it’s possible that transportation stats can decline further in the weeks ahead.
Unfortunately, that puts XOM stock in an awkward position despite nearer-term bullishness. If you won on the speculation, congratulations! However, you may want to consider an exit plan.
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.
