Things are going from bad to worse for U.S. crude oil. On April 17, West Texas Intermediate futures for May delivery hit an intraday low of $17.31 per barrel. The last time U.S. oil prices were this low was almost 21 years ago in June of 1999, when Shania Twain and the Backstreet Boys were topping the charts with That Don't Impress Me Much and I Want it That Way

Massive production cuts still well short of unprecedented demand disruption

The ongoing COVID-19 crisis is hitting the oil industry hard. Initial fears that oil demand would fall as much as 20 million barrels per day -- a 20% drop in global consumption many thought was outlandish -- are now proving to have been conservative. Global demand is now expected to be as much as 35% lower through April and into May as global transportation and industrial activity remains idled. 

Stacks of oil barrels.

Image source: Getty Images.

The situation is so unprecedented, even the recent deal between OPEC and other large producers including Russia, Mexico, and Canada to take 10 million barrels per day off the market is coming up severely short. Estimates are that U.S. oil storage facilities could be completely filled by some point in May, as producers have proven very slow to reduce their output. 

A wave of bankruptcies expected

The most at-risk companies in the sector continue to be independent oil producers. Whiting Petroleum (WLL) recently filed for bankruptcy, while Chesapeake Energy (CHKA.Q) and a major Chesapeake investor have both hired law firms specializing in bankruptcy negotiations in the past two months. 

The implications of a flooded market aren't being held to just the onshore companies. Diamond Offshore Drilling (DO) has decided not to make its next interest payment, an event that will put it out of compliance with various other debt covenants, and likely lead to it also going through a bankruptcy reorganization, wiping out common shareholders. 

Whiting and Diamond Offshore aren't the only companies in their sectors at risk. There are dozens of similar companies with large amounts of debt that they won't be able to afford as their cash flows plummet. The biggest risk to much of the oil sector isn't even the low pricing, but the lack of storage that will force many producers to shut off production -- further cutting off their cash flows -- because there's no place for the oil to go. 

More pain to come 

Global oil giants are acting quickly to take more oil off the market. Saudi Arabia announced it would cut its exports to Asia by an additional 2 million barrels per day starting in May, but much of the damage is already done. Between the continued overproduction and storage capacities on the brink of being filled, U.S. and other major oil markets could face many months of massive imbalance. 

Eventually, demand will recover as treatments for COVID-19 help reduce the health risk, but the massive glut of oil in storage could weigh on oil markets for the next year or more