A Dagger Aimed at the Heart of the U.S. Oil Patch

Here’s a joke for you: A beautiful young lady was walking across a field in Oklahoma and comes across a talking frog. The frog said, “Lady, please help me. I’m the CEO of an oil company. I was turned into a frog by a witch. I need a kiss to become human again. Do that, and I’ll give you half my wealth.”

The lady looked at the frog for a long minute, then put him in her pocketbook. “Sorry,” she said. “But a talking frog is worth a lot more than an oilman right now.”

As oil prices crashed early this week, some of my friends told me they were buying oil stocks. “Don’t rush,” I told them. “We’ll only know the bottom when we see it in the rear-view mirror.”

They didn’t listen. I can only imagine how their faces looked when Brent Crude prices dropped to a 21-year-low on Wednesday.

Historic Plunge

American crude oil prices are even worse. Monday saw a historic plunge in pricing when its May contract for U.S. West Texas Intermediate oil, the benchmark for U.S. crude prices, fell to its lowest-ever record price of negative$40.32 per barrel.

Oil’s price dropping into negative territory meant that major oil producers had to pay buyers to take oil off their hands. This reflects the evaporation of demand in markets amid the global coronavirus shutdown, and a subsequent lack of storage space in the U.S. for oil.

If you had five tanker trucks to take physical delivery of a contract in Cushing, Oklahoma, then theoretically, you could have been paid $37,630 to take it off the producer’s hands. I don’t know anybody who did this, but that sounds like a great deal to me. To the buyer, at least.

The front month crude oil futures contract settled at NEGATIVE $37.63 on Monday As the May oil futures contract rolled off, June prices looked better, but not by much. Oil went “up” on Wednesday to over $14 per barrel.

You know who makes money at $14 per barrel? Nobody.

Here’s a chart from a March presentation by the Federal Reserve Bank of Dallas that shows the minimum oil price per barrel for them to just break even.


 

So, not only is nobody making money … they can’t even cover their costs. You should expect bankruptcies, both big and small, in this industry.

Why are oil prices so low? Because oil producers kept pumping despite the lack of demand. With 22 million Americans out of work and many states issuing stay at home mandates, air travel has collapsed, and people aren’t driving nearly as much.

Demand Disappearance

The price of oil continued to slide even after OPEC and its allies agreed to the biggest-ever production cut. But big cuts can’t offset cratering demand as the coronavirus pandemic keeps society from operating normally.

It’s so bad that OPEC members are engaging in a giant game of phone tag, trying to organize a meeting online or by phone right now to cut production again. Good luck with prices.

Back on March 12, I published a Wealth Wave column titled, “I’m Not Buying the Pullback in Oil. You Shouldn’t Either.” In it, I explained how the Russians actually ramped up production in response to the global drop in demand: “The nation squarely in their sights is the United States. Specifically, our shale oil patch.”

I stand by that statement. It is a dagger aimed at the heart of the U.S. oil patch.

Alexis Weakley, a PR specialist at Refinitiv, gave her bottom line: “Oil prices are at these low levels because of a complete stoppage to demand,” she said in press reports. “We’re not dealing with demand destruction at this point, we’re facing demand disappearance.”

As I said, Brent crude oil dropped to a two-decade low on Wednesday. It traded as low as $15.99 per barrel. Neil Wilson, Chief Markets Analyst at Markets.com, wrote, “If global storage is running out—and that is what the Brent trade is starting to suggest—then there will be no bid and prices could hit zero.”

Expect prices to be lower for longer, at least until the pandemic runs its course, in hopes of the economy getting back to normal.

Storage Wars

Why can’t they just store the oil? Well, that would be a good idea … if storage wasn’t already full. Tanks at Cushing, Oklahoma, the delivery point for the U.S. crude futures contract, will be completely full in a few weeks with no additional storage to be found.


In the graph to the right, that top yellow line shows the surge in the number of barrels in global storage this year. It’s unlike anything we’ve ever seen.

Heck, tankers are even running circles in the middle of the Ocean just so they don’t have to drop off their supply and add it to the stockpile. Shockingly, at least one in 10 supertankers around the world is serving as a floating oil storage facility.

And it’s getting even worse! On Wednesday, the U.S. Energy Information Administration reported that U.S. crude inventories rose by 15 million barrels for the week ended April 17 to 518.6 million barrels. That’s the 13th straight weekly climb!

Is There Any Hope?

There’s always hope. And here, we’d be best to remember the old saying in the oil patch: “The cure for low prices is low prices.”

Here’s another chart from the Federal Reserve Bank of Dallas, showing the average price levels for each oil field to START new wells …


 

As more wells shut in and as production goes down, over-supply will ease, then prices will go higher. Even before prices get to the levels listed on this chart, speculators will start putting a bid back in oil.

Until then, that dagger in the heart of the U.S. oil patch is going to cut deeper and deeper. Bankruptcies will follow.

The best thing to do now is not go chasing after “bargains.” There are GOOD investments you can buy right now. Gold, for example. My Gold & Silver Trader subscribers just banked three nice rounds of gains. Quick gains, too. Gold is on fire!

There’s more where that came from. Just for now, avoid oil. The cycles will come around. I’ll let you know when it’s time to put money back to work in the oil patch. Just like the lady who avoided the talking frog, we’re going to do the same with investing in oil for the time being.

All the best,
Sean

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Comments 2

  1. Ru April 25, 2020

    How about oil cos. needing sorage space: e.g. tankers?

    Reply

  2. David April 23, 2020

    The bottom will come unexpectedly if war breaks out with Iran. We’re so far below production cost making this the play of the year. Remember when gold was at production cost? As always, just a matter of timing.
    😀

    Reply