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Oil Stocks Are Dead – The Pandemic Put the Final Nail in the Coffin

Last Updated September 23, 2020 2:19 PM
Mark Emem
Last Updated September 23, 2020 2:19 PM
  • Both the IEA and OPEC have revised oil consumption forecasts downwards in the wake of the pandemic demand crash.
  • Even if there’s a recovery, oil stocks are unlikely to fare well under a Democratic administration.
  • The double-digit growth of renewables is another threat to fossil fuels.

Although oil stocks rank among the worst-hit equities in the wake of a pandemic-fueled demand collapse, their declining share of the stock market has been decades in the making.

In the early 1980s, energy stocks represented nearly 25% of the U.S. equity market capitalization . This has fallen to 2.7%. And with oil demand expected to continue falling, it’s hard to make the case that energy stocks are primed for a comeback.

Oil stocks
The combined market cap of energy stocks in the U.S. relative to the rest of the stock market has been falling since the early 1980s. | Source: BreakingViews 

Instead of a turnaround, the industry is bracing for a tidal wave of bankruptcies.

A Deloitte study released in June indicated that oil exploration and production firms stood to write down the value of their assets by up to $300 billion  in the first quarter.

The outlook hasn’t brightened since then. As of early this month, 23 shale oil companies  had already filed for bankruptcy.

Bulls might be tempted to argue that the creation of an effective COVID-19 vaccine – and the subsequent end of the pandemic – would bring relief to oil stocks with sufficient cash flow to ride out the crisis.

Don’t be fooled. Here are three reasons why the pain for oil stocks is not about to end anytime soon.

1. Subdued demand will pummel oil stocks long after the pandemic ends

After the historic drop in demand earlier in the year, bulls expected oil consumption to recover as economies reopened. That optimism has begun to wane.

The International Energy Agency (IEA) lowered its oil consumption projections  for both 2020 and 2021 today. The IEA predicts demand will plummet by 8.1 million barrels per day, equivalent to nearly 10% of daily world oil production  in 2019.

Video: Oil demand hasn’t recovered to pre-pandemic levels.

OPEC is even less optimistic. The organization expects oil demand to fall by 9.1 billion  barrels per day relative to last year. And this assumes the pandemic “will largely be contained globally.” Any further economic disruptions could hammer consumption even harder.

As for next year, OPEC expects “large uncertainties,” with a strong likelihood that demand will languish below pre-pandemic levels.

2. Oil stocks and Democrats don’t mix

Further darkening the outlook for oil stocks, Democratic presidential candidate Joe Biden looks like a near-lock  to win the 2020 election.

Compared to incumbent President Donald Trump, Biden’s policies are less friendly to fossil fuel companies.

Video: A Biden administration won’t help the bull case for oil stocks.

While Trump has promoted U.S. energy independence through increased extraction of fossil fuels, Biden’s plans favor increased investments in renewable energy .

If Biden wins in November, oil stocks will likely continue getting crushed no matter what the economy looks like.

3. Renewable energy has massive upside – fossil fuels don’t

Renewable energy was the only segment of the energy market to experience double-digit growth globally over the past decade. Consumption averaged an annual growth rate  of 13.7%.

oil stocks
Between 2019 and 2024, global renewable energy capacity is expected to grow by 50%. | Source: @Ecofasten/Twitter 

Analysts expect this blistering pace to persist in the years ahead. It’s going to come at the expense of fossil fuels as renewables eat further into sectors like transportation.

Take the vehicle market. While the share of electric cars  is still below 10%, it’s exploding rapidly.

electric vehicles
The production of electric cars has been accelerating over the past decade, and there’s still plenty of room for this market segment to grow. | Source: IEA 

Even if global energy consumption recovers more quickly than expected, and even if Trump is re-elected, renewable energy is only going to keep putting pressure on fossil fuel demand.

Oil stocks were on life support long before the pandemic struck – but it may have put the final nail in the coffin.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.