Last Friday, oil prices plunged by over 8% as markets decided to price in the risk of a re-emergence of coronavirus. The market is right to do so. In the U.S., a few weeks after Memorial Day, cases of coronavirus surged in almost half of the States.
In China, around 50 new cases broke the two-month streak of zero cases. The economy will continue to stagger for the foreseeable future. In South Korea, 49 new cases underline the difficulty in fully containing the virus from communities.
The uncertain recovery from clearing COVID-19 completely around the world suggests that energy demand will not benefit from a straight path upward. The re-emergence of higher infections and talk of the second wave of coronavirus will undermine investor confidence. Investors will not want to add to Occidental (NYSE:OXY), Haliburton (NYSE:HAL), Exxon (NYSE:XOM), Chevron (NYSE:CVX) or Energy Transfer NYSE:ET) too aggressively.
Energy companies are at the mercy of oil prices. But the high volatility in the commodity could hurt energy stock prices. Still, income investors may want a very small initial position in companies that pay a dividend income. If the world discovers a coronavirus vaccine or finds a way to manage the economy’s re-opening while minimizing the virus spread, the demand for energy will grow steadily. That would ensure that stocks like BP (NYSE:BP) or XOM will continue paying a generous dividend.
Disclosure: the author owns BP stock.
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