Exxon Mobil (NYSE: XOM) and Chevron Corp. (NYSE: CVX), U.S.’ largest oil companies, were among the first to take the hit from the new Russia– Saudi Arabia price war. Namely, Russia and Saudi Arabia, entered a war on oil production. Both oil giants are nothing less than determined to increase oil production, despite the weakened demand that is already resulting in excess supply. Moreover, this open war has already resulted in a record low price when it comes to the price of oil.
As for crude oil futures, they plummeted as much as 30% last Monday. This is by far their steepest drop since the 1991 Gulf War in. The U.S. market crashed on Wednesday night, a fall that continued onto Thursday as it also halted trading for the first time since 1997. Looking at this way, it could even seem that the COVID-19 didn’t have much to do with it but things are never black and white.
Oil War – Be Prepared For Quite An Overproduction
Regardless of the support of U.S. fiscal incentives, the oil market remains filled with anxiety. Exxon’s stock dropped 46%, while that of Chevron Corp. declined 31%. With the open war further heating up an already excess production on one side, the coronavirus is adversely influencing the demand on the other.
Therefore, by the looks of it, there isn’t even the slightest hope for a piece of good news. Furthermore, since Exxon Mobil is one of the largest integrated oil companies, it lacks the flexibility it needs to cut expenses and streamline short-term business operations, meaning that it can only further accumulate losses.
COVID-19 – The Cherry On Top
Also last Monday, BP Oil (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-A) pulled the FTSE 100 to one-day losses, something we have not seen since the dreaded 2008 recession. Meanwhile, PetroChina Company Limited (NYSE: PTR) issued the force majeure notice to its suppliers along with suspending some gas imports due to the coronavirus pandemics that caused the softening of demand.
Can There Be A Winner?
When a war rages, rarely there are winners. However, in this scenario, the end of consumers could be the winner of this oil mayhem, since oil prices could end up being around $2 a gallon. It all comes down to a well-known proverb: dark on one side only means there is dawn for the other. But dawn isn’t so likely for the U.S. oil sector that is already facing cutbacks, forced mergers, and even some bankruptcies and most importantly, a shift towards renewable sources.
Even though coronavirus seems like a lesser evil for the oil industry currently, it is still far more powerful than any human-induced conflict. The COVID-19 is like the Grim Reaper standing above all industries and the global economy and rest assured, it is waiting to take its toll on the oil market as well.
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