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Oil Sector Doomed from This Bear Market

Story Highlights:
  • The oil market is collapsing. But this goes beyond the normal boom and bust cycle.
  • We are going to see a wave of bankruptcies.
  • Matt Badiali shares why you shouldn’t buy the dip in oil today.
Oil Sector Doomed from This Bear Market

It’s cheaper to buy a barrel of oil than a pint of beer in Canada. That’s how bad it is in the oil market.

There are two major problems with the oil today: too much supply and falling demand. This combination created a price collapse of historic proportions.

On March 30, the price of Western Canadian crude oil hit $4.26 per barrel.

As you can see in the chart below, the fall was extreme:

It fell 88% in about a month. That’s crazy.

And it isn’t just Canadian crude oil.

According to Bloomberg, a barrel of crude oil produced in the Permian Basin of Texas hit a low price of $11.34 per barrel on March 30. That’s the lowest price since 1998.

The last time we saw western Canada’s oil price collapse was from 2014 to 2016. The oil industry was in deep trouble. That’s what this latest decline signals, too.

We’re going to see a lot of bankruptcies.  According to the Houston Chronicle, the oil and gas industry saw 400 bankruptcies since 2015. More than half of them were Texas-based.

The latest high-profile bankruptcy was Whiting Petroleum Corp. (NYSE: WLL). This former giant shale player produces about 125,500 barrels of oil per day. However, thanks to the low oil price and high cost of operation, the company lost $70 million in 2019.

It declared bankruptcy because it had billions of dollars in debt coming due in 2020.

A scan of the North American energy industry shows another 59 companies with that kind of problem. More than a billion dollars in debt and losing money.

Names like Occidental Petroleum Corp. (NYSE: OXY), Chesapeake Energy Corp. (NYSE: CHK), Noble Energy Inc. (NYSE: NBL), Apache Corp. (NYSE: APA) and Antero Resources Corp. (NYSE: AR) are all in danger right now.

You may be tempted to buy one of these names because their share prices are at or near 20-year lows.

But don’t get faked out by minor rallies. The truth is, major producers like Russia, Saudi Arabia and the U.S. can’t cut enough production to make these companies solvent again.

The only way we’ll see the oil price rally is on demand resurgence. With much of the western world on lock down due to the coronavirus, that isn’t going to happen soon. So, if you are thinking about buying an oil company today … don’t do it.

With oil prices below $40 per barrel, these companies are ticking time bombs. If the oil price stays that low, many oil companies will follow Whiting Petroleum out of business.

Cheap stocks can always get cheaper.

Good investing,

Matt Badiali

Editor, Real Wealth Strategist

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