Crude oil futures had one of their worst days in the past year on Monday. Two of the world's most-important benchmarks, West Texas Intermediate and Brent, fell 3.7% and 3.9%, respectively, after word came out this weekend that the coronavirus is spreading more rapidly outside of China than was first expected. According to reports, outbreaks in Japan, South Korea, Iran, and Italy have spread rapidly, and could threaten economic activity as those countries take steps to prevent the spread of the disease.
As a result of the potential implications on global oil demand, crude prices fell sharply, dragging many oil stocks down even further. Here are more that fell sharply in afternoon trading:
|Oil Stock||Close (Decline)||Daily Low|
|Centennial Resource Development (CDEV 4.79%)||(8.6%)||(12.3%)|
|Callon Petroleum (CPE 4.07%)||(13.3%)||(14.3%)|
|Transocean (RIG 3.26%)||(9.1%)||(10.3%)|
|Petroleo Brasileiro (PBR.A 2.27%)||(7.6%)||(9.8%)|
|Diamond Offshore Drilling (DO)||(8.1%)||(10.4%)|
|PBF Energy (PBF -0.92%)||(8.7%)||(10%)|
The spread of coronavirus continues to wreak havoc in oil markets. The International Energy Agency already warned that it expected to see global oil demand fall in the first quarter due to China's efforts to halt the spread in that country. If this prediction comes true (which seems increasingly likely if COVID-19 continues spreading into more developed countries), that would mark the first quarterly decline in global oil demand in a decade, when the global financial crisis sent the world's economy into recession.
For the oil companies above, a decline in demand couldn't come at a less-opportune time. There is already substantial oversupply, not just in existing production, but in available resources that could be quickly brought to market. Simply put, it's not a good time to be a leveraged oil producer like Brazilian oil and gas giant Petroleo Brasileiro (Petrobras) or Centennial Resource, or a company that provides contracted services to the oil and gas industry, like offshore drillers Transocean or Diamond Offshore.
To start, selling in a panic over fears of what will happen as coronavirus spreads is usually not the best investing strategy. Most of the time it proves a mistake, when investors sell good companies with strong, durable advantages over short-term fears. But with that said, falling oil demand in an already-oversupplied energy market increases the risks for companies already burdened with debt and weak cash flows.
That includes many of the companies on this list, with oil refiner PBF Energy and Petrobras the only two that have generated positive free cash flow over the past year and only PBR Energy carrying no long-term debt at the end of its last reported period. The biggest lesson investors should take from today's massive sell-off is: If you want to profit with energy stocks, finding companies with a strong balance sheet and low costs is key, but even that may not be enough to avoid losses in the short term.