The energy sector outlook is in turmoil right now. The price of oil hasn’t just crashed; it’s gone negative! Over the past few weeks, the price of oil was trading at levels seen in the 1860s. These are unprecedented times, and we are seeing some crazy markets.
Energy Sector Turmoil 2020
Impacts of COVID-19 on the Energy Sector
As lockdowns are imposed in most countries, transportation and travel have been restricted. Without the need to fuel cars, trucks, liners, and airplanes, energy demands have plummeted.
Demand for domestic electricity has increased as people are confined to their homes, but commercial use has dropped.
Oil has essentially become a semi-redundant source because of the economic slowdown. The demand has completely nosedived, and price wars have contributed to falling stocks.
U.S. Energy Sector Infrastructure
The U.S. leads the way in production, supply, and consumption of energy.
Corporations manufacture not just oil, coal, and gas, but renewable fuels and renewable sources. For example, solar power, wind, hydropower, nuclear energy, and geothermal are generally all in growing demand.
According to Select USA, the U.S. has a complex infrastructure that transmits, distributes, and stores energy. Demand and innovation pushed total investments in the U.S. energy sector to $350 billion in 2018, according to the International Energy Agency. Also, in 2018, foreign investors contributed almost $173 billion to the energy industry.
The Energy Industry in Recent Years
The financial crisis of 2008 saw ever-increasing oil prices drop from over $160 per barrel of oil to under $50 a barrel.
The S&P 500 stock market index measures the stock performance of 500 of the largest companies listed on U.S. stock exchanges. When oil did peak at the beginning of 2008, 17% of the S&P 500 index was the energy sector. That equates to 85 companies.
In April 2020, energy made up just 2.8% of the S&P 500 index, and that figure is rapidly declining.
Seven of the top 10 stocks in the S&P 500 back in 1980 were energy companies, with Exxon Corp topping that energy list.
Effects of COVID-19 on The Energy Sector
The International Energy Agency (IEA) has reported a 25% drop in electricity use for countries in full lockdown. Electricity demand reduces, on average, 20 % for each month of the lockdown or 1.5% on an annual basis.
The IEA also reports an estimated drop in global oil demand of 9%, which is now likely to be significantly more. This equates to consumption levels of 2012!
They also predicted a reduced coal consumption of up to 80% because of reduced electricity consumption.
Although the stock market is very adaptable over time, and the energy sector has dominated over the past four decades, it has taken a much worse hit recently.
The Energy Sector Outlook
One positive thing about being in such a bad state; the energy sector can only get better. As the world comes back ‘online,’ reports are already looking optimistic.
U.S. oil prices climb 20%. Colin Cieszynski, the chief market strategist at SIA Wealth Management, said: “As more economies start to reopen, crude oil finds itself in the opposite situation of where it has been, as the forces which drive the price collapse—falling demand and a failure to cut production—start to reverse into a situation of potentially recovering demand and falling production.”
API data revels a weekly climb of 8 million barrels. “The American Petroleum Institute reported late Tuesday that U.S. crude supplies rose by 8.4 million barrels for the week ending May 1, according to sources. The API data also reportedly showed gasoline stockpiles down by 2.2 million barrels, while distillate inventories climbed by 6.1 million barrels.”
Energy is one of the essential commodities in the world, but markets are incredibly confusing now. Trying to predict any position is beyond challenging, but hopefully, the outlook seems to be improving.
What are your thoughts on the energy sector outlook? Do you see more problems before the situation gets better? Please comment below.