We are witnessing the greatest disconnect between equity prices and economic fundamentals in recent memory. And nowhere is that more evident than in the energy market where investors are pouring into oil stocks at the worst time ever.
Crude prices have fallen to their lowest level in two decades as OPEC economists slash their demand forecasts amid the coronavirus-led global recession. But energy stocks are soaring — with some names jumping by double digits for no reason.
Ill-informed investors are rushing to “buy the dip.” But they are trying to catch a falling knife. And it won’t end well.
Could the Robinhood trading app be to blame for this surge in irrational market behavior? Millennials may assume that the market will quickly bounce back because of their experiences after the 2007 recession.
It’s no secret, the global economy is in a massive recession, and demand for crude oil is drying up. Even if consumers wanted to take advantage of these historically low oil prices, they couldn’t. This isn’t a good time to take a road trip to New York or a plane flight to Milan, Italy — unless exposure to a deadly infection is part of the itinerary.
That’s why it should come as no surprise to see that oil is still falling despite OPEC’s agreement to cut production.
Oil isn’t facing a supply challenge, it’s a demand challenge. Global oil demand has fallen by a third, and the world is running out of space to store unwanted crude. This could end up sending prices below zero as producers start paying customers to take delivery.
The U.S crude industry will feel the brunt of the pain because of the high costs and excessive leverage in the shale industry. And the craziness may start sooner than expected.
According to The Wall Street Journal, a massive flotilla of Saudi Arabian tankers with seven times the normal monthly amount of oil is making its way to the United States. This supply surge is expected to compound the U.S.’ storage problems and possibly send prices closer to zero. In Fargo, North Dakota, wholesale gas prices have already hit a staggering 12 cents per gallon.
The Robinhood app introduced the stock market to a generation of low-information millennial investors — many of whom came of age in the aftermath of the Financial Crisis in 2007.
To these traders, bad fundamentals are an opportunity to “buy the dip” and hopefully profit from a massive rebound. This may have led many to pour into oil stocks in an attempt to benefit from their currently low prices.
Here is what one poster on the popular wallstreetbets subreddit has to say about this controversial market-timing strategy:
Buying the dip is a consistent strategy that always works.The market always goes back up, and you print free money. If it crashes, everyone is dead from the coronavirus anyway, and then it doesn’t matter.
While this post seems tongue in cheek, it received over 2,000 upvotes on the subreddit. The post may be an accurate representation of the sophistication (or lack thereof) of the average millennial investor.
WTI May crude has fallen 10% to $17.83 Friday afternoon — this as OPEC predicts oil demand will drop 6.8 million barrels a day in 2020. However, oil stocks have moved in the exact opposite direction, with many posting massive rallies despite the bad news.
Exxon Mobil (NYSE: XOM) and Chevron (NYSE:CVX) are both up over 6%. Paradoxically, shale stocks (which face the most bankruptcy risk) have soared even further with many posting double-digit rallies on the day.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.