Crude price below $50 turns Exxon bearish

The market fancied a huge rally in the price of crude oil in December 2016, following the production cut agreement reached between the OPEC and other oil producing countries, including Russia. Even fundamentally poor performance in the fiscal 2016 fourth-quarter did not result in a noticeable decline in the share value. The world’s largest integrated oil company Exxon Mobil Corp (NYSE: XOM) is one such example.

However, the bad news is piling up for oil companies, as explained below, and this would invariably erode the market capitalization of oil companies, including Exxon.

In March, for the first time in 2017, the oil prices dipped below $50 per barrel. For a host of reasons, analysts believe that the trend is unlikely to change in the medium-term.

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Firstly, Saudi Arabia has increased production by about 263,000 barrels per day in February, compared to the earlier month. This takes the Saudi’s output tally to 10.011 million barrels a day. It is still less than the level of 10.058 million barrels per day agreed in November. However, oil traders are even worried about a marginal increase in production, considering the record high inventories in the US.

According to the EIA (US Energy Information Administration), in January 2017, OECD’s (Organization for Economic Co-operation and Development) oil inventories jumped 22.3 million barrels to 3,109 MMbbls. The reported figures were greater than the five year average. In the week ended March 10th , the US crude inventories decreased marginally by 237,000 barrels. However, it still does not offset the production increase announced by Saudi Arabia.

The EIA also anticipates shale production to increase to 4.96MMbpd in April, 2017. It is the highest reported volume since March 2016. Forecast of lower economic growth in China is also expected to hurt the crude price.

Rusty Brazel, a commodity analyst, in an interview to CNBC, stated that oil price would continue to remain low in the foreseen period. Brazel argues that the US shale producers have become more efficient and have learnt to manage making profits at a price of $50 per barrel. The latest fracking technology has enabled an increase in production, without much change in operating costs. The fossil fuel deregulation to be brought about by the US government is also expected to support an increase in the production. Lower crude prices would severely affect the bottom line of Exxon Mobil.

Thus, fundamentally, we anticipate the stock to remain range bound with bearish bias. The chart below indicates a decline in the reading of the CCI (Commodity Channel Index) indicator, which is popular among commodity traders. The descending momentum indicator also reflects an increase in the selling pressure. So, we can look forward to a downtrend soon. Resistance for the stock exists at 82.50. Minor support exists at 81.

A put option can be bought to speculate on a decline in the share price of Exxon. To make money quickly out of the short-term trend, an expiry date falling within 10 trading days should be chosen. It would also be advantageous to purchase the put option when Exxon trades near $82 in the NYSE.

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