Crude oil futures are in free fall today. Brent crude is down almost 7.5% to $46.28, the first time since June 2017 that it's dropped below $50. West Texas crude is taking an even bigger beating, down 8.1% to $42.18 at this writing. Today's massive sell-off is tied to worries that a prospective deal between OPEC+ member states to cut 1.5 million daily barrels from their production is falling apart.
This deal, which was proposed by OPEC members to the additional countries that make up OPEC+, hinged largely on Russia's willingness to make big cuts. OPEC members agreed to take 1 million barrels in cuts but Russia is proving unwilling to shoulder the bulk of the half-million barrels in additional cuts proposed.
The sharp drop in crude prices pales in comparison to the sell-off in the stocks of independent oil and gas producers. The sell-off is broad and sharp:
|Producer||Price change on March 6|
|California Resources Corporation (NYSE:CRC)||(12.1%)|
|Callon Petroleum Company (NYSE:CPE)||(22.8%)|
|Denbury Resources (NYSE:DNR)||(13.3%)|
|Oasis Petroleum (NYSE:OAS)||(27.6%)|
|Parsley Energy Inc. (NYSE:PE)||(13.6%)|
|SM Energy Company (NYSE:SM)||(23.1%)|
|Vermilion Energy (NYSE:VET)||(16.8%)|
Oil producer stocks are taking a massive beating, since oil prices are their livelihood. Oil prices are not just at multi-year lows, but they have also fallen so quickly and so sharply, many of the assumptions these energy companies use to project cash flows and plan for capital spending may not be completely valid now. That's particularly true if oil prices stay at current levels for a sustained period of time.
I have consistently said that the independent oil and gas producer subsector of the oil and gas market is in my "too hard" bucket. There are so many moving parts that affect oil prices, and sentiment plays a huge role in stock prices across the sector. And I think that reality means most investors should avoid these stocks entirely, particularly considering how much more volatility we will likely see in the weeks and months ahead, as coronavirus' full impact on the global economy remains unclear.
At some point in the near future we could see an opportunity to invest in some of the better-run players in this space -- like Denbury Resources -- as the market stabilizes. But I don't think we are at that point yet, and uncertainty breeds volatility that frankly, too many retail investors aren't comfortable riding out.