Shares of oil stocks, including ExxonMobil (NYSE:XOM), Phillips 66 (NYSE:PSX), and ConocoPhillips (NYSE:COP), crashed sharply lower in Monday trading, ending the day down 5.1%, 7.1%, and 7.5%, respectively. In part, the share price declines can be traced back to declines in the price of oil -- as you'd expect -- with the cost of WTI crude falling 0.8% today, and Brent crude prices declining 1.2%. But in part, this story is bigger than a single day's change in the cost of crude oil.
After all, declines of just 0.8% or even 1.2% aren't very big -- certainly not big enough to explain, all on their own, the 7.5% decline in Conoco's share price! What's more, if you look closely you might notice that the price of oil is actually up -- not down -- nearly 5% over the past week.
So what does explain the declines? Well, consider what's been happening in the news lately. On Wednesday last week, the day before Thanksgiving when perhaps few investors were paying much attention to the direction of oil futures, The Wall Street Journal reported that it had just come into possession of ExxonMobil internal documents. And according to these documents, the oil giant is anticipating lower oil prices "for much of the next decade."
Indeed, ExxonMobil has revised its forecasts to predict oil prices 11% to 17% lower than previously forecast in each of the next seven years, as energy demand remains dampened as a result of a slower economy post-coronavirus, all around the world.
Nor is ExxonMobil the only one worried. As CNBC reported today, OPEC officials, too, see "immense challenges" from the pandemic. OPEC President Abdelmadjid Attar warns that coronavirus has dealt a "massive" and "severe" blow to the global oil industry and, as "the pandemic continues to rage with cases soaring in many regions around the world," demand for the fuel may remain depressed at least into 2021, prompting renewed calls for extended production cuts.
The good news (for energy investors) is that production cuts are probably going to happen eventually. As Reuters reported this afternoon, OPEC and allied oil producing nations such as Russia are continuing to discuss extending their current policy of keeping oil production 7.7 million barrels per day below capacity into early 2021 at least. The bad news is that not all members are on board with this decision, with Russia in particular arguing for a production increase of 0.5 million barrels per day as early as January.
If Russia gets its way, and barring any immediate uptick in global oil demand from the expected arrival of multiple new coronavirus vaccines, oil companies could see their hard-won price gains in oil over the past week erased in a matter of months. Investors' decision to abandon oil stocks today suggests that -- irrational as it may seem -- the chance that oil producers will decide to increase production in the middle of a glutted market is a very real risk, and cannot be discounted.