Oil prices have witnessed a massive tumble this week, steepest since the 1991 Gulf War, which dealt a huge blow to the already scuffled upstream industry. The WTI Crude price index is currently trading around the $31 per barrel mark compared with $51.42 on Feb 13. A similar trend has been witnessed for Brent Crude, which tumbled nearly 65% in the past month to $33.45 per barrel. While this weak price environment is deadly for the upstream energy industry, we expect some downstream companies to thrive in this situation.
The oil price crash came on the heels of the OPEC+ meeting, which saw a Saudi Arabia-Russia disagreement over deeper production cuts to boost oil market fundamentals. As Saudi Arabia failed to secure Russia’s support for additional cuts, it threatened to flood the oil market by boosting production. That was enough to trigger the oil price plunge, which was already in a panic mode due to the coronavirus outbreak (COVID-19).
Reacting to the market situation, Cenovus Energy Inc. (CVE - Free Report) decided to cut its 2020 capital spending and production guidance by 32% and 5%, respectively. In a similar move, Matador Resources Company (MTDR - Free Report) , an exploration and production company, decided to operate half of its current drilling rigs. While these companies were the first to respond to the oil price crash, more upstream companies are expected to follow suit in the coming days.
Companies to Gain
Low crude price is always good for refining and marketing companies as it reduces production costs and expenses. Valero Energy Corporation (VLO - Free Report) and Phillips 66 (PSX - Free Report) are two of the companies that can take advantage of the low crude price. Moreover, there are some integrated energy mammoths like Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) with ample international exposure. Their refining and marketing operations are expected to gain from weak oil prices. All of these four companies have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, the international refining market suffered in the last two months as fuel demand growth declined following the coronavirus outbreak. However, things are improving for the second biggest economy in the world, which was also the epicenter of the outbreak.
China's Fuel Market Showing Improvement
China’s new daily cases of infections have been declining in the past two weeks. The country is now easing lockdowns and quarantine zones in some areas, which have put industrial activities on a recovery mode. While the economy is slowly recovering, oil imports are reportedly increasing and fuel demand is expected to go up. This will act as a positive catalyst for the overall fuel market and refining companies will likely gain.
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