The stock market has been unforgiving to the oil sector so far in 2020. With West Texas Intermediate (WTI) crude having been above $60 per barrel as recently as January 7, 2020, the spillover effects of the coronavirus spreading to other nations, on top of China’s shutdown, hurt demand enough that crude oil prices went under $45 per barrel in the final week of February. Crude was back above $47 per barrel in the first week of March, but it has taken a surprise 50-basis-point rate cut by the Federal Reserve and two of the past three days seeing major rallies to get there. Many investors are still puzzled by the lack of interest and outright disdain that the stock market has for the top energy stocks.

One issue that may be key to the energy sector’s stock performance is what happens with the Organization of the Petroleum Exporting Countries (OPEC) ahead of what is expected to be yet another round of oil production cuts. A note from Goldman Sachs has suggested that even an additional 1 million barrels per day in production cuts from the OPEC+ countries would be weak. That is against a 2.1 million barrels per day destruction in global oil demand in the first half of this year. Goldman Sachs has now lowered its demand growth target of 550,000 barrels a day for 2020 down to a drop of 150,000 barrels of demand per day.

On March 2, Merrill Lynch lowered its average price deck for 2020 oil prices. The targets were cut to $54 from $62 on Brent crude and to $49 from $57 on WTI crude. All this seems to be setting up for a bad scenario for the oil and gas giants. Where things are looking even more bleak is in the more speculative and smaller exploration and production companies, which have been adding on more debt and leverage to their books. Some of those lesser stocks have seen their shares fall to unprecedented levels.

JPMorgan was out with cautious view on the oil majors on Wednesday. Exxon Mobil Corp. (NYSE: XOM) was maintained with a Neutral rating and its target was cut to $64 from $72 in that call (versus a recent $51.30). Chevron Corp. (NYSE: CVX), which was trading at $94.39 before a 2% gain on Wednesday, was kept with an Overweight rating, even as JPMorgan trimmed its price target to $127 from $135. Occidental Petroleum Corp. (NYSE: OXY) was reiterated as Underweight at JPMorgan, which also cut its price target to $37 from $42.

Citigroup and Merrill Lynch were also cautious on big oil. Citigroup maintained Chevron as Neutral and cut the target price to $100 from $120. Merrill Lynch reiterated its Underweight rating while cutting its price objective to $110 from $120, and that is after just having cut the price objective from $125 last week.

Chevron recently said that it did not expect to contribute vast dollars into renewable energy, and the firm anticipates returning some $75 billion to $80 billion in capital to shareholders through 2024. Exxon also even proposed some framework for sectorwide regulations of methane in the atmosphere.

Other firms have trimmed their price targets or issued outright downgrades on the oil majors during or since the equity markets carnage that began two weeks ago.

On March 2, Morgan Stanley maintained its Overweight rating on Chevron while cutting its target to $137 from $144. The firm also maintained its Equal Weight rating on Exxon and cut its target to $73 from $79.

On February 28, Merrill Lynch trimmed that super-high $100 price objective on Exxon to $99.

On February 27, Goldman Sachs maintained its Buy rating on Chevron but lowered its target to $127 from $130.

On February 24, Cowen maintained its Market Perform rating on Exxon while trimming its target to $58 from $65. Cowen had just lowered its target earlier in February.

Perhaps the largest issue the oil companies face in 2020 and beyond is not just the politics around global warming or climate change. The investment community has been rather aggressive on the ESG investing theme, and the “E” for “environmental” has been working against these companies.

Many pension funds and institutional investors have started to carve out energy from fossil fuels from their portfolios, and others have begun making strategies easier for their clients to avoid investing in those companies. That sets up the potential for a no-win scenario if oil prices rise back up to $80 or go back under $30. If there are fewer and fewer investors willing to invest in those companies, it might not matter if they are cheap at a theoretical 10 times earnings, or even cheaper at six times ahead.

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