As one of the worst-hit sectors due to the novel coronavirus pandemic, the oil market has really become a benchmark for the new normal. Obviously, oil represents the underlying economy’s mobility. If people are getting over their fears of Covid-19, that should result in higher oil prices, thereby boosting sector stalwarts like Exxon Mobil (NYSE:XOM). Therefore, it doesn’t matter if you’re not interested in this space. Exxon Mobil stock is a tremendously useful gauge of confidence.
Source: Jonathan Weiss / Shutterstock.com
So, it’s a bit disconcerting that XOM shares have been struggling since hitting a peak in early June. Of course, that was when we saw a surprisingly positive jobs report, along with lift in publicly traded companies that utilize oil, such as United Airlines (NASDAQ:UAL). Over the past few weeks, Exxon Mobil stock has been decidedly negative, while major indices have continued to tick higher.
Is this merely investors becoming unreasonably bearish on XOM? At first glance, this narrative holds water. During this pandemic, a few sectors have performed extraordinarily well. One of these fortunate markets is electric vehicles. Given their fewer moving parts, EVs are more reliable than combustion-engine cars, all other things being equal.
Further, not having to change oil during a health crisis is a major plus. On the flipside, such a dynamic is a drag on Exxon Mobil stock.
Still, I believe even the most ardent EV advocates realize that the sector has a long way to go before upending fossil fuels. As great as Tesla (NASDAQ:TSLA) is, its deliveries number in multiples of thousands. On the other hand, traditional automakers see deliveries in the millions. Therefore, I don’t think EVs are responsible for XOM’s woes.
Exxon Mobil Stock Could Be a Broader Harbinger
If not alternative fuels, what then ails Exxon Mobil stock? As I’ve mentioned in prior articles, the oil market has a very simple but powerful headwind: lack of demand. Without people commuting and traveling at pre-pandemic levels, any oil-based investment will be a tough sell.
I’ve seen some reports that suggest traffic is steadily improving. However, data from TomTom.com of automotive congestion levels in major U.S. cities imply that this recovery narrative has peaked. I’m inclined to believe TomTom because air passenger volume data suggests the same thing.
Yes, more people are flying since the worst of this crisis. However, the rate of improvement is disappointing. For example, from July to August, air passenger volume on a year-over-year basis increased from 26% to 29%.
An improvement? Yes. But not enough to get excited about Exxon Mobil stock.
Another worrisome detail is that from the start of this year to mid-July, XOM and used-car dealership CarMax (NYSE:KMX) shared a 75% correlation coefficient. Statistically, this is a strong, direct correlation. But from mid-July onward, the correlation almost did a perfect 180, pegging -73%.
Click to EnlargeSource: Chart by Josh Enomoto
In other words, up until mid-July, XOM stock and KMX were trading largely in lockstep. But then, something happened in that month which not only caused the correlation to fail, but now, it’s an inverse relationship.
Again, this worries me. Clearly, Exxon Mobil stock is a blue-chip investment. The smart money loves XOM. I’m not saying they don’t love CarMax. But XOM is a bellwether, a gauge of the rubber meeting the road.
But with an inverse correlation with a massive used-car dealership, the smart money is telling everyone implicitly that they don’t believe that more rubber will meet more roads. If so, I’d be very careful here.
XOM May Face More Pain
Not only are we in a pandemic, we’re also suffering from an unprecedented economic calamity. Under such circumstances, buying a used car (if you have the means) makes sense. Sure, cars aren’t great investments. But they’re invaluable tools because they help you make a living, among other benefits.
Thus, it’s odd that Exxon Mobil stock hasn’t responded to the apparent demand for used cars. Yeah, I know that XOM has problems unique to the organization. But oil prices have also been flat since mid-July. Shouldn’t oil indices move convincingly higher on Americans wanting to make driving great again?
At best, all I can say is that we have two parties: those that believe the economy will improve (KMX buyers) and those that have a darker perspective (XOM sellers). One of these parties will be wrong. Given the terrible circumstances we’re in, I have a feeling that Exxon Mobil isn’t done selling off.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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