Oil stocks collapse as fuel consumption stagnates – Motley Fool

Shares of a wide range of oil stocks are dropping sharply today, following the US Energy Information Administration’s latest weekly oil data survey. According to the latest update, US refinery production has fallen by nearly a million barrels per day, while gasoline consumption, measured by the amount of refiners supplied to the market, remains stuck in a near narrow band. of 9 million barrels per day.

Due to the persistent delay in a further recovery in demand for transport fuel, producer stocks in particular are taking it by the wayside. At the time of this writing, actions of Matador Resources (NYSE: MTDR), Antero Resources (NYSE: AR), Range resources (NYSE: RRC), and Southwest Energy (NYSE: SWN) are down between 5.3% and 8% (although they are more concentrated on natural gas than on oil).

On the other side of the coin, stocks of refining and oil logistics, including Phillips 66 (NYSE: PSX) and Sunoco LP (NYSE: SUN) are among the few oil stocks that are growing today.

Americans did a lot less in the summer of 2020 than they did last year. Image source: Getty Images.

Oil recovery blocked at neutral

Each week, the EIA publishes a report that presents important statistics on imports, commercial storage and refineries. On the bright side of the report, U.S. commercial crude oil inventories fell 9.4 million barrels from the previous week, and imports fell to 4.9 million barrels per day, about 1 million lower. than the previous week. This, on the surface, is positive for the industry, which has been faced with a massive glut of excess inventory that continues to weigh on oil producers and prices.

Yet even with this move in the right direction, U.S. commercial crude storage is still 14% higher than the five-year average, while gasoline and distillate inventories are 13% higher than a year ago. a year.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price Data by YCharts

The biggest drag on the industry right now is the lack of recovery in demand for oil. U.S. refiners supplied 8.9 million barrels per day last week and 3.7 million barrels of distillate, down 9% and 16% respectively from last year’s levels, and roughly flat in the past two months. The overhang of the coronavirus pandemic continues to weigh on the transport sector, especially the automotive sector. Millions of Americans continue to work from home, and peak driving season is coming to an end, with a little helping hand from vacationers avoiding air travel and heading to a place of leisure instead.

The latest data was worrying enough that oil traders were sending significantly lower crude futures today. As of this writing, West Texas Intermediate, a key benchmark in the United States, is down more than 3%. That sets a significant chunk of U.S. oil for October delivery at around $ 41 a barrel or less, well below profitable prices for most shale-focused producers.

The flight of oil investors to safety

As noted, the oil inventories that soared on today’s news were oil refiners and midsize companies. While demand has certainly not recovered, and will continue to weigh on refiners who rely on volume to make money, investors see them as best suited to weather the current weakness in demand and prizes and earn money.

The same thesis is passed on to operators of pipelines and storage facilities. They may not ship or store the same volumes of oil or refined products as in 2019, but with little or no direct exposure to commodity prices, these companies have much more stable and reliable cash flows than they did in 2019. investors are looking for. .

Yet even these companies are not completely risk free, as their contracts are with oil producers. For example, the pipeline giant Energy transfer (NYSE: ET) faces loss of $ 300 million contract with bankrupt Chesapeake Energy, who asked the bankruptcy court to cancel a major pipeline contract with the former.

But for companies like Phillips 66 and Sunoco, with large operations and limited exposure to oil prices or to a single client, investors see the safety and benefits and, most importantly, the potential to overcome what might turn out to be. the worst downturn in the history of the oil industry. .

So far, both have been able to continue paying their dividends and are committed to doing so.

SUN dividend chart

SUN dividend data by YCharts

Antero, Range Resources and Southwestern Energy have seen their stocks take the other direction this year, largely because their focus is more on natural gas than oil, which has helped them avoid the worst of the recession. . However, even they could face a difficult second half, with projections for a mild winter indicating weaker than usual demand for natural gas as the weather cools.

Winter is coming

As the peak summer driving season draws to a close and the coronavirus pandemic continues to weigh on demand for oil, oil traders are turning decidedly bearish on the prospects of a rapid recovery. Many U.S. producers have been fortunate enough to have oil hedges that have helped them achieve prices much higher than benchmark prices, but those hedges are already starting to wear off, resulting in even more oil production that is not. not profitable below 40 dollars a barrel.

Moreover, there is still a huge risk on the part of Russia and Saudi Arabia, which are ready to turn on the taps and absorb as much of the growth in demand as possible in the coming months, and potentially resume. their fight against market share that sparked the 2020 oil crash.

The industry has already seen dozens of bankruptcies, both of private companies and a growing list of public companies, including Petroleum whiting, Diamond drilling at sea, Ultra Oil (for the second time in recent years), Oil and gas extraction, Chesapeake Energy – to name a few of the most notable.

The reality investors face is that the worst may not be over for many oil stocks; oil prices have improved but are still not profitable for many producers. In addition, many producers have been protected by their hedging agreements and, as these expire, more producers will be exposed to the full burden of current weak demand and low prices.

Outside of more secure and diversified companies like Phillips 66, investors are expected to enter the oilfield slightly for the foreseeable future.

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