I hope the Federal Reserve has its money printer ready because this means energy companies, cruise lines, airlines, mortgage service providers, and Main Street businesses all still need more handouts. | Source: Mark Wilson/Getty Images/AFP
- Donald Trump has made it clear that the federal government will provide welfare for the struggling oil industry.
- While this may help “supermajors” Chevron and Exxon Mobil, the future for smaller producers is very unclear.
- Without a sustained rally in the price of oil, government support cannot prevent a wave of layoffs already underway.
Amid a historic rout in crude oil prices, President Donald Trump has vowed to protect the U.S. energy industry.
Unfortunately for bulls, the supply-demand curve is out of control. So while another round of bailouts could rescue Big Oil stocks like Chevron and Exxon Mobil, there is only so much even the Federal government can do to prop up the flailing sector.
Trump Pledges Government Support For Oil Sector
A meltdown in oil prices spurred the White House to vow to protect the U.S. energy industry. | Source: Yahoo Finance
The U.S. oil industry, which has powered a large portion of the economy’s recovery since 2008, is suddenly in dire straits.
Following waves of layoffs, the White House finds another sector in crisis. Many energy companies will inevitably need substantial government welfare to stave off bankruptcy.
That’s why Trump vowed to “make funds available” to help this struggling sector stay afloat.
Source: Donald Trump via Twitter
I hope the Federal Reserve has its money printer ready because this means energy companies, cruise lines, airlines, mortgage service providers, and Main Street businesses all still need more handouts.
But the simple fact is that while Fed dollars might provide temporary support to oil stocks, you can’t print consumer demand.
It doesn’t matter how many bridge loans you hand out. At some point, people need to start burning crude again. And until they do, oil producers will keep switching off their wells and shutting down their rigs.
Chevron & Exxon Mobil May Be Able to Weather the Storm
The good news for oil “supermajors” like Chevron is that if they can survive this crisis without suspending their dividends, their stock prices may hold up quite well.
Trump will do his best to provide a backstop. And with all the demand destruction going on, current production levels are unsustainable. Once the world economy finally gets back online, Chevron could thrive in a market that may eventually find itself suddenly undersupplied.
Exxon Mobil is not in as strong a position as Chevron, and its dividend looks far more vulnerable. Despite this, XOM is still well off its yearly lows even after June futures for WTI crude fell beneath $10 today.
Chevron (dark blue) and Exxon Mobil (light blue) are both under pressure, but each stock has rallied well off its yearly lows. | Source: Yahoo Finance
But as is always the case, the little guy may not be as well-off as Wall Street.
The oil price plunge has already cost the state of Texas at least $1 billion in revenue. Snowballing layoffs began in March, and Trump’s assistance will come too late to bring those jobs back. The best the government can hope to do is provide benefits to those who are unemployed.
Despite boasting about the “Art of an Oil Deal” on Twitter, the White House has seen its OPEC+ supply cut fail utterly to balance the crude markets.
Source: Donald Trump via Twitter
A deluge of Saudi Arabian oil is on its way to North America, and storage capacity is running desperately short.
Trump Can Backstop Big Oil, But He Can’t Save Smaller Producers
Investors appear relatively confident that Wall Street oil companies will weather this storm.
Even Occidental Petroleum – the smaller, more debt-laden peer of Chevron and Exxon Mobil – has avoided breaking out to fresh yearly lows.
Donald Trump’s public display of support provides another cushion for these Wall Street giants.
But smaller producers – the beating heart of the industry – cannot resist the gravity of single-digit oil prices should the downturn fester much longer.
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.
This article was edited by Josiah Wilmoth.
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Last modified: April 21, 2020 9:01 PM UTC