Energy Sector Blues

The effects of COVID-19 have been tough on the Energy sector, to say the least. With businesses around the global shuttered and vacations called off—and an estimated 40% of the global population ordered to stay at home—demand has fallen sharply. And that has taken both the price of oil and energy stocks down with it.

During the first three months of the year, the price of WTI crude oil fell by more than 83%, from $61.06 per barrel on December 31st to $10.01 on April 21st. It briefly dropped below zero on April 20th, falling as low as -$37.63—something that has never been seen in the 155-year historical record.

Oil prices have experienced a record-breaking drop

Source: Bloomberg, as of 04/21/2020

With the viability of hundreds of companies threatened, the sector has seen the highest volatility within the overall market. While energy shares have outperformed since the overall market low on March 23rd, we don’t advise chasing performance. Rather, until there is more clarity around the economic impact from COVID-19, we think taking a more measured approach to sector allocations is appropriate at this time. Therefore, we are maintaining a marketperform rating on the Energy sector.

Oil demand is down

Unprecedented business closures and stay-at-home orders around the globe are having a major impact on the demand for oil, which the U.S. Energy Information Administration (EIA) has forecast to fall by more than 23 million barrels per day in Q2—or about -23%. As of April 7th, airlines had cut flights by more than 75% in the U.S., according to Official Aviation Guide (OAG). The number of travelers has declined to about 100,000 per day, down from more than 2 million one year ago, based on Transportation Security Administration (TSA) records. Implied demand for gasoline has plummeted, with refineries cutting back liquid fuel production by more than 40%, according to the April 17th EIA report.

Implied demand for gasoline has fallen

Source: Bloomberg, as of 04/21/2020