Oil is Brimming Near Storage Capacity. Again.
65,446 was the peak supply of barrels at the Cushing, Oklahoma oil stock facility the last week of April 2020. This week, supply is brimming near the top at 59,892 barrels (source: EIA.gov). Global supplies have surged by more than a billion barrels since the beginning of the year (source: OPEC).
When the pandemic hit earlier this year, Russia and Saudi Arabia ushered in the Oil War. Oil prices went negative. For the first time in history, oil traders had to pay customers to take oil off their hands.
Since then, OPEC+ countries have cut production. Many oil and natural gas companies have been forced to take some wells off-line. There has been over 30 oil and gas bankruptcies, including Chesapeake Energy, Whiting Petroleum and Extraction Oil & Gas this year. And still we find the world swimming in too much oil stock.
Will Oil Prices Tank Again?
So far, oil prices have remained fairly steady, though low, even with oversupply and a dramatic drop-off in sales and revenue from major oil companies. Exxon Mobil reported a revenue drop of -28% in the 3rd quarter, with Chevron’s sales sinking by -56%.
Basic Supply and Demand
Libya oil came back online in October, increasing oil supply. However, the pandemic roared with a vengeance, limiting demand. OPEC forecasts that global oil demand will be down -11.3% in 2020 from 101.5 million barrels/day in 2019 to 90 million b/d in 2020. If the forecasted 2021 recovery materializes, then demand will be down just 5.4% from 2019 levels, at 96 million b/d. OPEC projects that demand will be higher than ever by 2025, to 104 million barrels/day. The World Oil Outlook “anticipates that oil will remain the dominant fuel… for the foreseeable future, accounting for a nearly 28% share in 2045, followed by gas at around 25%.”
Is that too optimistic in a world where air travel has dropped to the lowest levels since 1954 and where Working from Home is becoming de rigueur? Many economists, analysts and CEOs are noting that there have been structural shifts. Some technology companies have indicated that Work from Home will be a permanent option for at least a part of their workforce. Zoom has made it possible, even pleasurable, to host long-distance meetings and conferences that feel intimate, while increasing productivity. General Motors is investing in a world of “zero crashes, zero emissions and zero congestion.” Environmental activists are pushing to replace single-occupancy vehicles with mass transit and micro mobility, and to power the grid with renewable energy. More and more people place climate action at the top of their to-do list.
So, who will be using all of this oil? According to the WOO, future demand will be led by China and India, making a world climate agreement essential to planetary protection. However, the U.S. is still the top consumer of oil worldwide.
Whatever happens in the post-pandemic world, the challenge today remains over-supply.
Electric vehicles are the hottest products in the auto industry, with Nio (China’s Tesla) seeing sales soar by 146.4%. While sales at GM and Ford dropped by half in the 2nd quarter, Tesla’s dip was only 5%. Tesla’s sales rebounded 39% year over year in the 3rd quarter of 2020.
The U.S. remains the world’s largest petroleum and natural gas producer, though U.S. production is expected to drop to little “because new drilling activity will not generate enough production to offset declines from existing wells,” according to the EIA. (The U.S. became the #1 natural gas producer in 2009 and the #1 oil producer in 2013.) The EIA expects U.S. crude oil production to fall from 12.2 million b/d in 2019 to 11.4 million b/d in 2020 and 11.1 million b/d in 2021. Brent prices will remain near $40/barrel through the end of the year, and increase to $46.60/barrel in 2021, if EIA projections prove accurate. However, as you can see in the chart below, the outlook for price is highly uncertain. Is it possible that very high stock levels and continued low demand are being downplayed in an attempt by the industry, government officials and policymakers to just keep prices where they are as long as they can?
Are More Bankruptcies in the Cards
Occidental Petroleum has a speculative (junk bond) rating from S&P Global, at BB- with a negative outlook. Oil and gas prices would need to increase, combined with a decrease of debt load, to put Occidental back on solid fiscal ground. Transocean is in worse shape. While the company has, so far, avoided bankruptcy with a series of debt swap deals, the terms of those deals has been challenged in court. There are a few disgruntled creditors who are trying to force a bankruptcy, saying that Transocean has already defaulted on the terms of their bonds.
Your Best Bet?
Share prices of oil companies are down by more than half. The small dividend you get from this volatile industry isn’t worth losing half of your principal. If you’re hanging on, hoping to recover losses, then now might be a good time to reconsider that plan, particularly if your company is at risk of a bankruptcy. (At minimum, check what the credit rating agencies are saying.) Typically, stock becomes toilet paper and bonds take a haircut when companies are forced to restructure their debt.
As an example, Occidental Petroleum dropped by 82% between February 19th and March 23rd, 2020, from $47.58/share to $8.52/share. The stock has doubled since its April 2020 lows, and is now trading at $16/share. Transocean stock is still down 60% from its 52-week high. However, share prices have more than tripled since they hit a low of 65 cents on October 30, 2020. Hoping to regain the January 2020 heights is a dangerous bet that Occidental and Transocean will not have to restructure their debt. While selling low might feel wrong, there is an opportunity cost when you hang on to recover losses, rather than profiting from superstars, like Nio, which has seen its share price shoot like a rocket from $2 to $57 in 2020.
If you’re active in sustainability, then now could be the perfect time to put your money where your heart is, as a consumer and as an investor. Having a cleaner/greener portfolio requires basic financial literacy. However, a plan that works can be easy as a pie chart, once you learn the ABCs of money that we all should have received in high school. Learn more in my book The ABCs of Money 4th edition or in our New Year, New You Financial Empowerment Retreat Jan. 16-18, 2021.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
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About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 4th edition of The ABCs of Money was released on October 17, 2020.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.