Stocks

Oil Plunges Again, but Oil Stocks Are Surprisingly Resilient

Even amid another sharp drop in oil futures prices, the shares of refiners were rising, and the Dow Jones Industrial Average and S&P 500 were up more than 1%.

Refiners were rising, a small positive sign that investors expect demand for things like gasoline to improve.The Dow Jones Industrial Average and S&P 500 were up more than 1%.

Oil prices plunged again on Monday, with West Texas Intermediate crude falling more than 20%.

Yet oil company stocks, after falling along with the commodity, rebounded later in the morning. The disconnect is striking, given that oil stocks would normally plunge when futures were down this much.

West Texas Intermediate futures fell 25%, to $12.64 a barrel. Brent crude, the international benchmark, fell 8.4%, to $19.65 a barrel. The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund (ticker: XOP) was down just 1.1%. The S&P 500 was up 1.4%, while the Dow Jones Industrial Average had risen 1.3%.

Still, producer Pioneer Natural Resources (PXD) was 1.3% higher, and Chevron (CVX) was up 0.2%.

Refiners were rising, a small positive sign that investors expect demand for things like gasoline to improve. Valero Energy (VLO) was up 3.9%.

The stocks of U.S. producers have already fallen more than 50% this year, and investors are likely waiting for earnings results to start coming in this week to determine which stocks can persevere through the downturn.

While Monday’s 25% drop in oil prices looks enormous in percentage terms, it does not change the fundamental challenge facing producers. Whether oil is at $12 or $15 a barrel, no producer can make money at these prices. The companies’ fates will largely be determined on factors outside their control -- such as the success of efforts to reopen states that have been shut down because of Covid-19.

The latest price for the commodity move only reinforces the distress in the oil market. West Texas futures fell below zero a week ago, a move that many traders hadn’t even thought was technically possible. They quickly rebounded into positive territory but have stayed at extremely low levels.

Covid-19 has resulted in a severe drop-off in oil demand -- a drop of 25% or more this month—and millions of barrels of crude are now being pumped into storage tanks instead of being sent to refiners.

U.S. production will have to fall for the market to balance, but oil producers don’t want to be the first one to turn off production. They would rather wait to see if someone else will do it first. That means that those decisions will come “down to the wire,” argues Edward Moya, an analyst at currency broker Oanda.

“It is very expensive to shut-in production and the risks of damaging the well will keep many producers waiting to the last moment to act,” Moya wrote on Monday. “Oil is in for another wild ride and energy traders should not be surprised if we see prices continue to remain heavy.”

Write to Avi Salzman at avi.salzman@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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