It is hard to recall just how bearish some investors were on ExxonMobil (NYSE: XOM) a couple of years ago. Over the past year alone, the Exxon stock price has doubled. It now stands above $100 and close to an all-time high.
So why have I sold all of my Exxon shares?
Cyclical energy markets
Energy markets tend to be cyclical. When selling prices are high, producers invest in new projects. Those can have long lead times. So by the time oil gets pumped, the economics may have changed completely. Suddenly, a glut of oil leads to crashing prices. In turn, that leads to less spending on new projects for the future – setting up the whole cycle to start again.
A couple of years ago, energy demand was uncertain and producers like Exxon dramatically cut their capital expenditure. In 2020 alone, Exxon spent almost $10bn less on capex than it had originally planned. Other energy majors also made deep cuts. Meanwhile, pandemic-era falls in energy use are a thing of the past in most markets. There have also been unexpected supply shocks, such as those caused by the Russian invasion of Ukraine.
Soaring Exxon stock price
All of this has helped push Exxon’s price upwards. A tighter supply outlook, robust demand and high selling prices have meant the company has been in clover. It earned $5.5bn in the first quarter alone.
But that is not the only explanation for the surging Exxon share price, in my view. A couple of years ago, some investors worried that the oil giant’s huge Guyana project could turn out to be a white elephant. What was the point of spending vast sums to develop a new oil project when there were doubts in some quarters that oil and gas demand would ever recover to 2019 levels, let alone grow further?
Fast forward two years and a lot has changed. With resurgent oil demand, the massive Guyana project looks like a smart move on Exxon’s part. It ought to be pumping 340,000 barrels per day later this year.
Pandemic-era cost cuts also mean the company is now leaner, so it can turn a profit at a lower oil price than before. Its breakeven cost per barrel of oil has fallen well below $40. Meanwhile, the benchmark WTI crude oil price has soared to $120 per barrel.
My move on Exxon
It feels like everything is suddenly going swimmingly for Exxon. That makes me a bit nervous, given the cyclical nature of the oil market. High prices will not last for ever — but I think they have been a key factor in driving up the price of Exxon lately.
That is why I have sold all my Exxon stock. Both oil prices and the Exxon share price may go higher from here. But, as Warren Buffett cautions, I am sometimes fearful when others are greedy. At some point I think the current oil bubble will pop, so I have taken my profits off the table now. I will continue my search for what I see as more reliable stocks I can hold for the long term
