What happened
Saudi Arabia is raising the stakes even further in its plan to upend the global distribution of oil production, with the latest news over the weekend that the country was planning to further increase its oil output in May, adding 600,000 barrels to its planned massive 43% increase in exports starting on April 1.
At this writing, Brent crude futures are down 10.3% to $22.37 per barrel, while U.S. crude prices have fallen below $20. West Texas crude futures are down 7.3% and threatening to fall to the lowest levels in more than 20 years.
And this has stocks across various subsectors of the energy industry falling sharply:
| Oil Stock | Subsector | Price Change (Decline) on March 30 |
| Oceaneering International (OII 1.30%) | Offshore and undersea services | (9.9%) |
| Plains GP Holdings LP (PAGP 1.16%) | Midstream services | (10.6%) |
| Targa Resources (TRGP 0.81%) | Midstream services | (7.3%) |
| Matador Resources (MTDR -0.56%) |
Oil and gas production and exploration | (5.5%) |
As of close on March 30. Source: Yahoo! Finance.
So what
Today's big sell-off was ignited by Saudi Arabia's plan to add even more oil to the market in May, on top of a huge production and export increase that's set to kick in this week. Global inventories are already growing, as demand falls off sharply under travel restrictions that have ground global travel to a halt. Hundreds of millions of people around the world are either working from home, furloughed, or now (or soon to be) unemployed as vast swathes of the global economy are halted to lock down on the spread of COVID-19.
Image source: Getty Images.
The result: Global oil markets are about to be completely flooded. Estimates are calling for global oil demand to fall by as much as 20 million barrels per day. For context, that's the equivalent of all of Saudi Arabia's and Russia's oil production:
Russia Crude Oil Production data by YCharts.
And that's before both countries launched their war for global oil dominance.
Saudi Arabia seems to be intent on playing a long game here, with no hint that the country will relent on its efforts to upend global oil markets and reset the balance of power. As the chart above shows, Saudi Arabia and Russia have moderated their oil production over the past few years to stabilize prices, while U.S. producers have sharply increased output.
Those days are almost assuredly over, and that has put the entire U.S. oil and gas industry on notice. And to be clear, it's not just the independent oil producers at risk. Producers will likely be the first subsector to fall, as the weakest and most-leveraged burn through their cash and liquidity reserves in the months ahead.
Now what
Once the producers run out of cash, the companies that provide services to producers will start running into similar troubles. It doesn't matter how firm a contract is; a 10-year take-or-pay agreement with an oil producer isn't worth the paper it's printed on when the producer is insolvent. It's not just the companies in onshore oil at risk, either. Even offshore-focused service providers like Oceaneering International could see declines in demand as producers cut costs wherever they can.
When you start looking at the entire oil and gas value chain, it's hard to find much to like right now. There's massive uncertainty beyond one simple fact: The U.S. oil industry cannot survive on $20 oil. Even if Saudi Arabia were to back off on its plans to flood global markets and drive U.S. and other marginal production, the sharp decline in oil demand alone (estimates are that we will see a 20-million-barrel-per-day decline this year) will keep prices depressed for some time to come.
As things stand now, investors would do well to avoid the entire oil and gas sectors of the energy industry. As much as it looks like there's opportunity, there is tremendous risk that I think far outweighs the likelihood of picking winners at this stage. Besides, there are plenty of other stocks outside the energy industry that offer far better risk/reward profiles.
