BP Stock Rallied Off Jobs Data, But Demand Just Isn’t Back Yet

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Years from now, it’s likely our history books will see the oil industry as the poster child for the economic crisis caused by the novel coronavirus. Shocking everyone, crude oil prices slipped below zero for the first time ever, suggesting that it was more practical to pay to not take delivery. And unsurprisingly, companies such as BP (NYSE:BP) suffered severely. At its lowest point year-to-date, BP stock closed below $16.

BP Needs to Cut Debt to Protect Its Attractive 10%-plus Dividend Yield

Source: TK Kurikawa / Shutterstock.com

Lockdowns and quarantines around the globe gutted transportation in all forms. Personally, I wondered if there was enough room for most oil companies to survive. BP and the majors like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) probably have enough resources to weather the storm.

But no one goes into business merely to survive. If shareholders no longer see any point in engaging the sector, it could be a long year for oil, even among the alpha dogs.

Thus, the recent May jobs report was the catalyst that BP stock desperately needed. Rather than continuing the doom and gloom narrative, the economy surprisingly added 2.5 million jobs. While you have to account for some nuances in the report, it did suggest that the worst is behind us.

That was really all that Wall Street wanted to hear. Not only did BP stock jump on the news, it even gave deeply beleaguered energy firms like Chesapeake Energy (NYSE:CHK) signs of life.

Just as importantly, all states have now initiated reopening measures to much fanfare. Most notably, Las Vegas reopened its casinos with strong mitigation processes in place. Despite heavy restrictions, guests flocked to Sin City’s opening day ceremony.

Still, you’ll want to be careful investing in oil. Here are three reasons why.

Air Travel Has Improved But Not Enough for BP Stock

During the depths of the crisis, the broader transportation industry screeched to a halt. To protect themselves against a highly infectious disease, millions of Americans stayed at home. Even if they could, many refused to fly for obvious reasons. Social distancing isn’t exactly conducive in a flying tube.

As you would expect, airports throughout the country were empty during the worst periods of the coronavirus. Using the Transportation Security Administration’s passenger screening data, we can deduce that April air travel volume sank on average more than 95% year-over-year.

But as Memorial Day weekend proved, Americans are gradually getting over their fears. Initially, this was a good omen for BP stock. However, keep in mind that so far in June, air travel demand is still down more than 85% on average against 2019 levels.

Yes, that’s a significant lift from April. But I’m not sure how long BP stock — or any other oil-based equity — can sustain its newfound bullishness when air travel capacity is only at 15% of last year’s levels.

Auto Traffic in the U.S. Has Cratered

Another worrisome factor for BP stock is automobile traffic. Naturally, when most states shuttered their economies, very few people bothered to drive, except for essential functions. Thus, we saw surreal images of major metropolitan areas like Los Angeles and New York City appear like ghost towns, even during rush hour.

But with states that had locked down — including economic powerhouses like California and New York — now reopening, auto traffic has picked up. Unfortunately, like air travel, the move is only significant due to comparisons against low benchmarks. Against pre-pandemic levels, traffic is nowhere near normal, portending volatility for BP stock.

Using data from TomTom, auto traffic congestion in Los Angeles for the first week of June was down 68% against the year-ago level. In New York City, this metric was down 71% YOY.

Don’t get me wrong — I’m glad we’re making progress. But I’m not sure how auto traffic running at 30% of normal capacity is sustainable for BP stock.

Chinese Traffic Data Is Not Encouraging

Finally, let’s talk about President Trump’s favorite non-U.S. country: China.

As the President has reminded us at every turn, Covid-19 came from China. That makes the world’s second-biggest economy public enemy number one, at least if you work at the White House. But for economists, Chinese traffic data gives us some insight as to what we might expect back home.

Again, I don’t think the stats are very encouraging. For the first week of June, auto traffic congestion slipped 34% YOY in Beijing. Comparatively, this is far superior to our own metropolitan areas.

But keep in mind that China is still an expanding economic power. Thus, in the second week of this year, congestion was up 34% YOY.

In context, Chinese traffic levels being anywhere in negative territory is a bad sign. It also suggests that global oil demand is nowhere near as high as the BP stock price increase implies.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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