Oil Wars and Demand Erosion Do BP Stock No Favors

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Multinational oil and gas giant BP (NYSE:BP) enjoyed a stellar performance last week. But isolated enthusiasm isn’t enough to convincingly move the needle for BP stock.

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For one thing, the company took a huge blow in the Friday March 27 session, reminding everyone that we’re far from leaving the woods. Of course, the most pressing headline issue for not just BP, but the entire energy sector, is the ongoing oil price war.

No Matter Who Wins, BP Loses

A bitter dispute between Saudi Arabia and Russia has left the markets on edge. When the coronavirus began to look like a global issue, not merely a national one, the Saudis offered a simple, seemingly-sensible proposition to the Russians: cut production so that oil-exporting nations could mitigate the impact of deteriorating demand.

During the last energy crisis, Russia cooperated, though begrudgingly. This time around, they gave a firm “nyet.” Outraged, the Saudis reversed years in efforts toward rapprochement, instead flooding the world with cheap oil. Obviously, this is a development that BP stock absolutely did not need.

To be fair, many analysts are skeptical that Saudi Arabia can keep up this war of attrition. First, Russia has an excellent balance sheet.

Second, years of western-led sanctions have reduced Russia’s dependence on global economic shifts, and in this case tremors. Ironically, these sanctions have afforded Russia stability, though at the cost of growth potential, according to The Moscow Times’ Jake Cordell.

However, Al Jazeera recently noted that the Saudis have refuted reports suggesting that they would talk to the Russians about stabilizing crude oil prices. That’s a direct blow to the U.S., which has its own oil interests to protect.

So long as this feud keeps up, BP stock will face significant turbulence.

Not Just Supply Worries

Interestingly, the New York Times points out that because global oil supplies are so filled to the brim, we will eventually encounter problems storing it all. Forget peak oil: we’re now in a world of peak storage!

In this crazy world we’re living in, it may be capacity limitations, not the implosion of either the Saudi or Russian economies that brings them to the negotiating table. However, if you’re holding significant shares of BP stock, I wouldn’t necessarily cross my fingers for this event. Even if we fixed the supply issue, oil has a perhaps crippling demand problem.

With the coronavirus bringing everything to a halt, I’ve been forced to reexamine old assumptions about the markets. Regarding BP and big oil peers like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), I’m not sure if they can just bounce back.

Let’s assume that tomorrow, the coronavirus goes away, and everything returns to normal. Under the pre-virus paradigm, a fewer proportion of Americans have been buying cars. In the 1980s, the working age population accounted for 9.1% of total vehicle sales. During the 1990s, this figure dropped to 8.9%.

In the 2000s, which featured major negative societal and market events, the allocation declined to 8.6%. The following decade — a period supposedly marked by a great recovery — allocation dropped further still to 7.9%.

At this rate, it’s very possible to see this metric fall below 7%. Put another way, irrespective of supply, an increasing number of Americans just don’t see the benefit of buying cars.

And this negative trend is occurring in other places throughout the world. For example, China is the world’s largest automotive market. But even in early 2019, a slowing economy contributed to substantially reduced sales. Thus, BP stock can’t win on the demand front.

Where Do You Go?

Last week, President Trump signed a historic $2 trillion economic stimulus bill. Unlike other emergency packages, regular people will get checks. As well, key industries will receive necessary stimulus. Still, this raises important questions.

First, the bill may just be a fiscal bandage for oil-consuming industries like the airliners. Whether travelers are scared to go, or their personal finances have been wiped out, demand for this sector faces a crucial test. I don’t think it’s unreasonable to assume many airliners will go bankrupt. Logically, this mess is a net negative for BP stock.

Second, some industries like the cruise liners won’t receive any stimulus funds. Thus, we could witness an entire industry being decimated, with very few survivors limping home. Indeed, the appetite for most types of personal transportation is gone and it may take years for recovery.

Once this crisis is over, I anticipate that BP stock will be around. However, I’m not sure what kind of global economy the underlying company will return to.

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.

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