Oil stocks skyrocket on news from China


What happened

Actions of independent oil producers are up on May 18, following news from China that the country’s domestic oil consumption has recovered much faster than expected. Refined petroleum products like gasoline and diesel are being consumed at levels near China’s levels earlier this year, according to Bloomberg reports earlier this year, before the country imposed severe travel restrictions to stop the spread of the virus. coronavirus.

As a result of this news, crude futures have risen a lot around the world. Brent and West Texas Intermediate futures, for delivery in July and June respectively, are up more than 7% as of this writing to reach their highest levels since early March.

And that has stocks of independent oil producers rising by double digits:

At 1:45 p.m. EDT May 18. Data source: YCharts.

So what

It has been three very difficult months for the above independent oil producers. Since oil prices began to fall seriously in late February, global demand for oil has fallen to 30 million barrels per day, while global oil production has not fallen as quickly. As a result, not only have oil prices fallen to some of the lowest levels since the 1990s, but US crude futures contracts actually spent almost an entire trading session at negative prices in late April.

Since then, prices have steadily increased as world production has increased and the collapse in demand has reached its lowest point. Today’s news that China, the epicenter of the COVID-19 pandemic, is showing an almost complete recovery in oil demand has sparked a race to get back into oil inventories as soon as possible in the recovery.

Image source: Getty Images.

Now what

Let’s apply a fair amount of context to today’s news from China, as well as the reality on the ground in the oilfield. On the one hand, it is certainly good economic news that China’s transport and industrial oil consumption has recovered quickly, and it gives hope that we could also see a faster recovery in other parts of the world. world.

Now let’s look at the other side: The oil market remains in disarray, and US-focused producers still face months of weak demand and low prices. Global crude futures are still in the $ 30 range, prices at which few global oil producers can make money, and far below levels that US producers just need to break even on a cash basis.

One of the aggravating factors is the oil glut which could increase further, even if demand in places like China picks up. While the US Energy Information Administration reported a decrease of 700,000 barrels in US crude inventories last week, analysis by the American Petroleum Institute of data from oil producers concluded that oil stocks were higher, not lower.

Add it all up, and while most oil producer stocks are going up today, certainly not all of them are looking good. If you are interested in buying during this oil rally, be sure to do your research. We have already seen oil companies go bankrupt and more bankruptcies are coming. The oil market will eventually recover as we overtake COVID-19. But it is still playing out and many oil producers will not survive the recovery.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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