After weeks of impressive gains that lifted a barrel of crude from the depths of coronavirus-induced ‘subzero prices’ and helped the commodity notch its biggest monthly increase on record, the rally hit a speed bump yesterday.
Oil prices fell 8.2% on Thursday, with WTI crude futures having its worst day in more than six weeks. The U.S. benchmark lost $3.26 to end at $36.34 a barrel on the New York Mercantile Exchange. Prices marked their lowest finish since Jun 1.
There was widespread selling in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – down 9% Wednesday. The two energy representatives in the 30-stock Dow Jones industrial average, ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) - both carrying a Zacks Rank #3 (Hold) - lost more than 8% each. Meanwhile, some of the biggest gainers of the S&P 500 included energy-related names like Occidental Petroleum (OXY - Free Report) , Halliburton (HAL - Free Report) , National Oilwell Varco (NOV - Free Report) and Apache Corporation (APA - Free Report) .
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are the factors that led to the plunge in oil price:
Record Oil Inventory: The U.S. Energy Department's latest inventory release revealed that crude inventories rose by 5.7 million barrels, versus expectations for a 3.2 million barrels decrease. A big jump in imports from Saudi Arabia and drop in exports to a seven-month low accounted for the surprise stockpile increase with the world's biggest oil consumer. This puts total domestic stocks at 538.1 million barrels – the highest on record, 10.8% above the year-ago figure and 14% over the five-year average. Bloated Inventories reflect that the oil market is not rebalancing as quickly as anticipated from the massive glut left by the coronavirus crisis.
Bearish Fed Commentary: U.S. Federal Reserve Chairman Jerome Powell recently pledged to maintain interest rates at near zero through 2022 to support the world’s largest economy. While this put downward pressure on the dollar - a positive for oil, economic concerns came back to haunt the commodity. In its statement, the Fed acknowledged that the economy is still struggling to regain momentum with a ‘long road’ to recovery. The dour outlook sparked concerns for weakened oil usage that was just starting to rebound from coronavirus lows. As a proof of the demand destruction, EIA estimates U.S. oil consumption in 2020 to plunge by 2.4 million barrels per day to 18.06 million barrels per day.
Second Coronavirus Wave: Adding to oil’s woes, investors remain worried about a second wave of coronavirus infections. As the United States hit 2 million coronavirus cases with a spike in new infections and hospitalization, there are apprehensions that country was perhaps premature in re-opening its economy. Resurgence in cases of the deadly pandemic could lead to another lockdown with many businesses forced to close again just after reopening. Moreover, this would create doubts around the trajectory of oil’s nascent demand recovery.
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