What happened
The shares of integrated energy goliath ExxonMobil (XOM -0.60%) fell sharply at the open on June 15, losing over 5% of their value in the first few minutes of trading. A sizable decline in the price of oil and in the broader equity market were the driving forces. However, by 11 a.m. EDT, it seems investors weren't quite as dour as they were at 9:30 a.m., with oil prices, the S&P 500 index, and Exxon's stock all paring their losses. Exxon, by 11 a.m., was down just 2% or so.
So what
The underlying theme here really isn't much different than it has been for several months: COVID-19. That, however, doesn't do justice to the situation that Exxon and most oil companies face, because it hides just how complex the dynamics are in the energy sector right now. The crux of the concern today is that efforts to contain the coronavirus, notably including shutting down economic activity, haven't been enough to stop COVID-19's spread. Indeed, as a number of U.S. states have begun to reopen their economies, they have seen an uptick in cases. China has also seen new outbreaks. But it's the tap-on effects that are so troubling for the oil market.
Image source: Getty Images.
Indeed, oil was already dealing with oversupplied markets when COVID-19 started to spread across the globe. When economic activity ground to halt in an effort to combat the coronavirus, demand plummeted. That, in turn, led to a massive imbalance, sending oil prices below zero at one point. Furthermore, there's a glut of oil sitting in storage that needs to be worked off before a sustained energy rally can unfold.
If the two largest economies in the world remain under pressure because of a resurgence of COVID-19, then the recovery in oil prices will take that much longer. So investors aren't acting irrationally, per se. But there's an interconnected web here and everything needs to move in a generally positive direction before oil prices head notably, and sustainably, higher. That includes OPEC members living up to the production cuts to which they have agreed and struggling U.S. drillers continuing to hold back on spending. COVID-19 is a key factor to watch, but it is hardly the only one that investors need to monitor today.
Now what
Until the trends are obviously positive, meanwhile, any bad news that touches the energy sector could send investors scurrying. Conversely, any good news could lead to a rally. Exxon's stock will simply go along for the ride as investors' moods shift between risk-on and risk-off. Put another way, investors should expect continued volatility here.
