Why Investors Don't Trust Oil to Rebound

By Markets Fool.com


Will exploration activity come to a standstill? Image: Chevron.

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The stock market has bounced around a lot lately, with yesterday's nearly 300-point drop in the Dow Jones Industrials reminding investors of all the uncertainty in the financial world right now. The wildly gyrating energy markets have been a huge source of that uncertainty, and Thursday morning's market action alone demonstrates the skepticism that many investors seem to have about the likelihood of a lasting rebound in the price of oil. Consequently, energy stocks remain under considerable pressure; despite making up a relatively small piece of the overall stock market, their impact on sentiment could start to undermine the healthy optimism that has underpinned stocks' advances over the past six years.

Why energy went wild Thursday
The oil pits saw huge moves Thursday morning, as Saudi Arabia and other members of the Gulf Cooperation Council coalition launched airstrikes within neighboring Yemen. With conflict in the nation that is next door to the leading oil producer on the Arabian Peninsula focusing on a group that some believe is backed by Iran, the military move once again heightens tensions in the always-volatile Middle East, but this time in what to Westerners seems like a brand new direction. In response, crude oil prices shot up more than $3 per barrel to briefly stand above $52 this morning, and benchmarks of energy stocks moved dramatically higher in pre-market trading.

Yet investors quickly lost confidence in the scope of energy's rebound, concluding the conflict would likely have a minimal effect on the production issues that have created supply and demand imbalances to send prices lower. As of 11:30 a.m. EDT, oil prices remained higher, but West Texas Intermediate had given up much of its prior gain to trade up slightly more than $1 and stand just above the $50 mark. Dow energy giants ExxonMobil and Chevron gave up previous gains and traded down respectively by about 0.6% and 1%.


Projects in high-cost areas could be the first to see delays. Image: ExxonMobil.

The big challenge facing energy investors is that even if oil prices climb higher now, companies' first-quarter earnings results will still be well below their year-ago numbers. That inevitable contraction will drive another wave of fear through the energy market, and it's unclear how quickly capital allocation decisions geared toward saving cash will result in falling supplies of oil and natural gas. With a potentially long lag before the impact of reduced exploration shows up in production figures, poor comparisons against 2014 results could last throughout 2015, testing investors' patience and potentially spilling over into other areas of the economy.

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In the long run, many energy analysts expect oil and natural gas prices to climb back to more normal levels. Yet the path to that long-run stability could be very rocky, and the one thing that investors hate more than anything is uncertainty. Until market participants know better what's going on, they'll take any rebound in oil with skepticism until proven otherwise.

The article Why Investors Don't Trust Oil to Rebound originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.