Brent crude oil futures fell almost 13% on March 16, sending the most important global oil price benchmark below $30 for the first time since Feb. 11, 2016, when it closed at $28.82 per barrel. The major U.S. benchmark, West Texas Intermediate, joined Brent in the rout, falling almost 10% to $28.63 per barrel.
That puts both Brent and West Texas crude down more than 55% since early January, one of the fastest 50% drops for crude oil in decades.
Oil price war making for a race to the bottom
What a difference a couple of months make. Going back to early 2020, expectations were the global oil demand would grow modestly in 2020 under relatively strong economic prospects. By early February, the outbreak and spread of the novel coronavirus that causes COVID-19 quickly changed those expectations, with the International Energy Agency one of the first to warn that global oil demand would likely fall in the first quarter because of China's early efforts to arrest the spread of COVID-19.
In early March, there was optimism that OPEC would reach an agreement to cut production in order to stabilize oil markets. Days later, OPEC proposed Russia join it for even bigger production cuts, with a deal to remove 1.5 million daily barrels of crude from the markets.
Then Russia balked, and Saudi Arabia went scorched-earth, slashing oil prices and promising to flood the market with 13 million barrels of oil per day, being joined by fellow-OPEC-member United Arab Emirates, which committed to increase its oil production by about one-third starting in April. Since then, nobody has blinked, and Russia reportedly could produce even more oil when its current deal with OPEC expires at the end of March. Part of Russia's argument to not cut is that it, along with Saudi Arabia, have cut output multiple times in recent years, while U.S. producers have opened up the taps:
As a result of these global oil giants' actions, energy stocks have taken a pounding. Broader stock market indices have fallen around 30% at this writing in 2020, while the Energy Select Sector SPDR ETF (NYSEMKT:XLE) has fallen 54%. Global integrated giants ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) have fallen 51% and 60.4% respectively. Oil producers ConocoPhillips (NYSE:COP) and Occidental Petroleum (NYSE:OXY), which rely more on oil prices than their integrated peers, have fallen 60% and 74% respectively from their 2020 highs.
Economic news getting worse
The ongoing war between Russia and its erstwhile partners at OPEC is flooding oil markets and driving prices lower, but increased economic uncertainty is playing a significant role in the falling price of oil as well.
The spread of COVID-19 around the world is accelerating, and governments are locking down on as many ways as people can spread the virus as possible. More than half of America's schools are now closed, and thousands of businesses have sent millions of employees home (some to telecommute while others are being furloughed). Every major professional sporting season has been either suspended or postponed, as have major college sports. The city of San Francisco just announced what essentially amounts to a citywide quarantine.
Many states are banning large public gatherings, and event promoters are cancelling events left and right. International air travel has been slashed and the cruise industry is all-but coming to a standstill.
Over the weekend, the U.S. Federal Reserve caught markets by surprise when it announced major steps to keep financial markets functioning. A key inter-bank lending rate was slashed to essentially zero, while the Fed said it would inject $700 billion into financial markets to make sure banks had the necessary capital to continue lending during a period of massive economic uncertainty.
Without a doubt, this is easily the most uncertainty the world's markets have dealt with since the Global Financial Crisis more than a decade ago. Even the U.S. federal government announcing it would buy 77 million barrels of crude oil for the U.S. Strategic Oil Reserve late last week wasn't enough step the big-picture fears that things will get worse before they get better.
What should investors do?
Two separate thoughts here. First off, this is absolutely, exactly the time investors should be looking to buy stocks. Market crashes have, time and again, proven the best time to buy stocks.
But ... things are likely to get worse before they get better for many oil stocks, and that means investors should be very careful and selective in what they buy. A smart place to start is with oil stocks that have a strong margin of safety and balance sheets such as Shell and ExxonMobil, versus independent producers. Those companies need higher oil prices, and crude could stay depressed for longer than many producers can stay solvent.
As much as it may look like there are dozens of bargain stocks in the oil patch right now, there's also significantly more risk of permanent losses than there was just two months ago. Now may be a better time to focus on other, lower-risk sectors with your buying, while building out a short-list of oil stocks to buy once market conditions start to normalize.