The energy sector is the worst performer on the S&P/ASX 200 Index (Index:^AXJO) this morning despite the historic agreement between OPEC+ members.
The Woodside Petroleum Limited (ASX: WPL) share price and Santos Ltd (ASX: STO) share price tumbled between 3% and 4% each, while the Oil Search Limited (ASX: OSH) share price lost 2.2% at the time of writing.
In contrast, the ASX 200 benchmark shed 1% in value and is now officially out of the bull market club. This is because its gain since the market bottom last month is just under 20% – the point that defines a bull or bear market.
Bears winning the oil debate
But even though the flattening of the coronavirus curve is giving reason for investors to feel more upbeat recently, sentiment is again souring towards our oil-exposed ASX stocks.
That's overriding the bounce in the Brent and WTI crude benchmarks, which are up between 1.5% and 2% each.
The price war between Saudi Arabia and Russia ended after the US helped broker a new deal between the world's major oil exporters over the Easter long weekend.
Oil outlook still gloomy
Experts warn that the production cuts agreed by OPEC+ nations won't be enough to rebalance the market. Demand destruction for fuel due to COVID-19 far exceeds the implied 9.7 million barrels of oil per day cut in supply.
As long as the lockdown persists, our roads and highways will be empty and airlines will effectively stay grounded.
Bank of America analysts estimate that oil inventories will surge by 12 million barrels a day in the second quarter and another 1.5 million barrels during the third quarter, reported CNN.
The biggest risk to the oil price
That's a major problem as oil storages are reaching "tank tops", an industry term used when the world is running out of space to store crude.
It is "tank tops" that pose a real threat to oil prices, and to ASX energy stocks by extension. When it starts to cost oil producers more to find places to put their excess oil than to give it away, that will see the commodity collapse.
This is why the oil price slipped into negative territory in some regions before. Oil companies worked out that it would be cheaper to pay customers to take the oil than to find a storage tank. It could happen again if the lockdown of major economies were to go on for much longer.
Foolish takeaway
This poses a real issue for many of our energy stocks. Their exposure to oil is indirect as they are more in the business of producing liquified natural gas (LNG).
In fact, Australia is the largest LNG exporter in the world!
LNG prices tend to follow crude, but with a three-month lag. Gas contracts are usually negotiated based on oil price expectations.
But the LNG market isn't facing quite the same challenges as oil. LNG is mainly used in power generation, and while demand is impacted by the coronavirus shutdown of industries, the industry isn't facing quite as acute a problem as its oil counterpart.
This will buy our energy stocks more time to react and evolve as needed, but the sector could be facing a longer bear market than the rest of the ASX 200.
