Following a lack of demand for crude and an abundant supply, oil prices tumbled into negative territory, with sectors that usually take advantage facing a COVID-19 headwind, an industry expert has explained.
According to JP Morgan’s global market strategist, Kerry Craig, the traditional winners from the low cost of crude oil are not benefiting due to a changing world.
“While sectors such as airlines, logistics and selected industrial (such as chemicals) traditionally benefit from low energy prices, they also face bigger challenges on the demand side of their businesses,” Mr Craig explained.
Olivia Engel, State Street’s chief investment officer, active quantitative equity, said some of these industries are actually suffering the most, mainly due to weak sentiment, as investors pull out their capital.
“In fact, the largest changes in overall attractiveness in stocks have mainly been caused by changes in market sentiment. The obvious segments – airlines, transport infrastructure, hotels, restaurants, luxury goods and automobiles – have suffered the most,” Ms Engel said.
“Until energy demand starts to improve, investors may choose to take a more cautious view on this sector. Much like other sectors, those companies that can survive during this period of pain stand to gain the most in a post-COVID world,” Mr Craig said.
How long will oil prices remain low?
Mr Craig explained that OPEC will likely rectify the situation, but the COVID-19-led evaporation of demand of oil will likely remain for some time.
“Even as/if virus containment measures ease in the coming weeks, the world is going to be awash in oil for some time – economies may be slow to get back up and running to a pace that would warrant a strong increase in demand, especially when it comes to international travel.”
The energy information administration is forecasting a drop in demand in multiples of what we saw during the financial crisis, which will likely lead to pressures on energy stocks until demand returns.
“In the meantime, energy stocks will come under further pressure, despite their already low valuations.”
“Companies in the upstream of the energy supply chain will face the greatest pressure. The US high-yield market and issuers from the energy sector will quickly experience dislocation – credit spreads have already widened considerably.”
While the current price of oil remains unsustainable as wells begin to shut down and OPEC is forced to reduce supply, State Street Global Markets’ senior multi-asset strategist, Daniel Gerard, agrees with Mr Craig’s prediction, although he suggests it could be lower for longer.
“Current conditions show that US oil production may just fill the gap that any OPEC+ cut may leave. This is exactly what has been happening for years. As OPEC supply fell, US supply took its place.
“This storage crisis is not going away for at least a few months, which means we will continue to see volatility with spot futures, and rolls. Barring a grand agreement from Saudi Arabia, Russia and Texas, which seems highly unlikely, current dynamics and low oil prices will persist. We see very low prices through the rest of 2020 at a minimum,” Mr Gerard concluded.
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