Market Overstates Coronavirus Impact on Energy Stocks
Oilfield services stocks appear to be the most undervalued.
The S&P 500 Energy index has already lost more than 15% so far in 2020, following the coronavirus outbreak and the likely knock-on effect on crude demand growth. The market has overreacted, in our view, making energy stocks look cheap at current levels.
In December, crude demand growth for 2020 was estimated at 1.25 million barrels per day (averaging forecasts from the Energy Information Administration, International Energy Agency, and OPEC). That would have been a modest rebound from the prior year, but lower than the recent trend; demand growth averaged 1.6 mmb/d in 2016-18. Now, the same forecasters are calling for just 960 thousand b/d growth in 2020, implying a 300 mb/d decrease due to the virus. The full impact could be more severe. By comparing the recent outbreak with the 2003 SARS outbreak, Capital Economics has estimated a 400 mb/d impact and notes that this is probably underestimating because China’s economy is more globally integrated today. In addition, while the coronavirus appears to have a lower mortality rate than SARS, there have been far more infections and there is still the possibility of a full-blown pandemic. As such, it appears the likely effect on crude demand will be more substantial than what most forecasters anticipate.
Dave Meats, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.