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It’s Now Time to Buy Back Into Marathon Oil
With production cuts and a little help from OPEC, oil prices have just begun to recover
It’s time to buy back into oil companies, like Marathon Oil (NYSE:MRO) stock.
Just weeks plunging well under zero on supply-demand issues, oil is making a sizable comeback. In fact, Brent crude is back above $35.
Along with it, oil stocks are just beginning to explode higher. Chevron (NYSE:CVX) just ran from a low of $50 to $92. Exxon Mobil (NYSE:XOM) jumped from $30 to $44. Marathon has run from $3 to $6.
From here, we could see higher highs in stocks like Marathon Oil with help from OPEC and a reopening economy. In fact, I believe the MRO stock could easily double from current prices.
The Worst May Be Priced Into MRO Stock
As with most oil companies, Marathon Oil didn’t fare so well with the coronavirus.
In its first quarter, it posted a loss of $46 million, or 6 cents a share, down from a profit of $174 million, or 21 cents a share, year over year. Adjusted, the loss was 16 cents a share. Analysts were looking for a loss of 14 cents, or 16 cents adjusted.
It then withdrew its guidance for the year thanks to coronavirus uncertainty, suspended its dividend and buybacks, and cut its capital spending budget by $1.1 billion to $1.3 billion.
Unfortunately, the company didn’t have much of a choice with the virus making mincemeat of most stocks on the market. However, the worst may have been priced in, as oil prices begin to rebound from negative zero.
Oil Production Cuts Are Helping Balance the Market
Months after Russia and Saudi Arabia flooded the market with unwanted supply, the two have joined other OPEC countries in cutting 10 million barrels a day. On top of that, the Saudis agreed to cut oil production in June 2020 by another 1 million barrels a day.
In addition, President Donald Trump promised the U.S. would pull back on oil output. In fact, “Trump said the U.S. would cut production levels by 250,000 to 300,000 in order to assist Mexico in meeting the parameters outlined by OPEC+,” as noted by The Hill contributor Rebecca Beitsch.
U.S. oil companies like Texland Production shut down 1,211 oil wells, and stopped production in May 2020. Even the number of rigs operating in the U.S. fell from about 800 to 600.
And, the Energy Information Administration (EIA) has even said U.S. crude production could fall to 7.8 million barrels per day in June. That’s a steep drop from 8 million in May. The EIA also just reported a fall of 5 million barrels in weekly supply.
All is helping to cool concerns of oversupply.
Better still, “the OPEC-plus alliance may extend May and June oil production cuts of almost 10 million barrels per day through the end of this year, an OPEC delegate tells Energy Intelligence. The delegate said a proposal to that effect would be discussed at the next OPEC -plus video-link meeting in June.”
Oil Demand Is Showing Signs of Returning
With economies beginning to reopen, there’s hope we’ll see far greater demand for oil.
At the moment, “While gasoline demand has staged a strong recovery as people go back to work, there are still several unknowns regarding the extent to which oil demand will ultimately recover,” said UBS analyst Giovanni Staunovo.
At the same time, Bloomberg reported that oil demand in China is back to pre-coronavirus levels. “According to Bloomberg’s sources, China’s gasoline and diesel consumption are already back to the pre-virus levels — a bullish sign for the oil market, which is looking at China for clues about when demand in the rest of the world could return to some form of normality,” says Oil Price contributor Tsvetana Paraskova.
Reopening economies in the U.S, and across Europe are helping to fuel demand, as well. With improving oil fundamentals, and the worst of the worst priced into the MRO stock, now may be a great time to accumulate. I strongly believe MRO could double from current prices.
Editor's Note:
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