Oil Stocks Should Continue To Be Avoided

Summary

• Oil stocks usually suffer more than the price of crude.
• Dividend yields of oil stocks generous but at extreme risk.
• Avoid oil stocks until crude inventories hit max.

The oil stocks are being clobbered, and one might be tempted to 'buy low.' After all, Chevron's (CVX) dividend yield is above 5%. Exxon Mobil's (XOM) dividend yield is nearly 7%. However, I remain bearish because experience has taught me that, when it comes to the stocks of energy companies, they tend to outperform the crude price (overshoot) and underperform when oil prices are falling. It is increasingly likely the stocks will continue to fall more in percentage terms than the price of oil. You can see this in the below chart comparing the price of Chevron (as one example) to the price of WTI crude.

(Source: Tradingview.com)

An advantage the U.S. has enjoyed over the past year is rising exports. According to the recent Energy Information Administration (EIA) Weekly Report:

U.S. crude oil exports averaged 2.98 million barrels per day (b/d) in 2019, an increase of 930,000 b/d (45%) from 2018 (Figure 1). The number of destinations for U.S. crude oil exports increased from 41 to 44, and Canada continued to receive the largest share (15%, or 459,000 b/d), followed by South Korea (14%, or 426,000 b/d). U.S. crude oil exports to China, the third-largest export destination in 2018, fell by nearly 100,000 b/d to average 133,000 b/d in 2019.

Although exports from the US to other countries more than offset the decline in China last year, this won't be the case for the next several months or even years. It is also unlikely OPEC can afford to reduce production sufficiently to help the industry in a meaningful way.

Photo by Worksite Ltd.

We need to wait for demand to rebound to normal levels, and there's no telling at this juncture how long this will take. No wonder then that crude futures prices are heading south. Just be aware the stocks will head even further south. The opportunity to buy will be provided when we see inventories of crude far above the five-year average but no longer climbing. You won't want to buy (no analyst will be sticking their necks out to recommend the stocks), but that'll be the time to step up and make some serious money. Yes, the dividend yields are way up there...until they cut the dividends.

Now, energy prices are falling again. It's difficult to determine how low the oil price can go, with coronavirus causing a literal seizure of international travel - of not just people, but the goods and services those people produce and consume.

The U.S. is now the largest producer of oil in the world. China is the 2nd largest consumer of crude. Even if OPEC members decide to lower production hoping to bolster prices, it takes a while to turn off those taps, and it takes gumption to voluntarily sacrifice badly needed revenues. With economic activity slowing down (it just has to), those revenues are even more crucial to Russia, the Saudis, and the much more troubled other members of the 'OILigopoly' (I made an economist joke LOL).

Source: CEIC

So, the oil consuming nation contributing the most to demand growth is putting an immeasurable damper on global oil consumption. It's not hard to understand why oil prices are falling ahead of the inevitable.

Not long ago, I bought back a few Canadian oil stocks thinking they'd already suffered enough. NOT! Clearly, I jumped the gun. The harder question now is should I concede defeat (sell) or average down? I'm not smart enough to entertain the third option - move to Alberta where housing is so much cheaper than in Toronto.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.