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Why Oil Dropped So Suddenly

By Mac Greer – Apr 22, 2020 at 3:08PM

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Oil demand has been falling steadily over the past few months, but a 41% drop in a single day is still concerning.

In this episode of MarketFoolery, Mac Greer and Motley Fool analyst Emily Flippen talk about the latest market headlines, the oil industry, and what drives the financial behavior of airlines. There are also tech updates on the fight against COVID-19 and some gaming news. Finally, they have news from the cannabis industry and suggestions on how to shop for cannabis stocks right now and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 20, 2020.

Mac Greer: It's Monday, April 20th. Welcome to MarketFoolery. I'm Mac Greer, and joining me is Motley Fool analyst Emily Flippen. Emily, how are we doing this Monday?

Emily Flippen: I am hanging in there. It does not feel like a Monday, time is meaningless to me, but so far, my Monday has been alright.

Greer: Isn't that the truth, it's just day and night and maybe weekends. Do weekends feel at all different for you or is it just day and night?

Flippen: We've been doing so much livestreaming here at the Fool, that I'm livestreaming a lot on weekends, too. So, really, it's just day and night for me at this point.

Greer: OK. Well, this day, April 20th, 4/20, is a date of significance in some circles; and we're going to talk about that later, Emily, as we talk cannabis. And we'll also talk some Facebook (META 0.07%); they've got a new gaming app among other things. But let's begin with the big picture.

Now, looking at the markets right here, Emily, the Dow really is not doing a lot, only down around 1% at the time of our taping, but the big headline, oil prices dropping to a 21-year low. Emily, of course, demand is way down and we've got these ongoing questions around when and how states might reopen. What do you make of it all?

Flippen: Yeah, it's amazing that the Dow hasn't gone down more than it is, because U.S. crude oil has fallen 83% since January alone. And the futures contracts that we're seeing in the market today, have fallen 41% today alone. So, there are serious concerns in the energy market, in the oil market, in particular, just because demand, like you mentioned, has fallen off a cliff. So, the true volatility we're seeing in the market today is because futures contracts are expiring on Tuesday and, more importantly, people are just concerned about where they're going to store oil.

So, when people hear that the price of oil has fallen, that might seem meaningless to you in your everyday life. But think about it this way, if you're a business or a consumer that uses oil, are you going to be buying it today or are you trying to predict when you're going to get back to work in the future and buying it in the future? And for most people, it is the latter. So, the fact that the price has fallen so much today is simply because nobody is using oil.

Greer: And let's talk oil stocks. Let's look at Halliburton (HAL 1.95%), an oil service company. They just reported better-than-expected profits. The stock is actually up today but they warned that their North American activity will decline sharply due to what you're just talking about. We've got oversupply and a massive drop in demand. So, does the investor in you at all find oil stocks intriguing right now?

Flippen: Not at all. In fact, Halliburton is probably going to be in for a really difficult quarter next quarter. Remember that when companies report, they're reporting on the previous quarter's basis. So, while it's better than expected, it's not to say that things are looking up for oil right now. Really, the concerns are really extensive for oil.

You know, the output cuts from OPEC nations aren't sufficient to cover just the lack of demand. I mean, they cut production by 10 million barrels a day, but demand on a daily basis has fallen by nearly 30 million barrels a day. And the Trump administration is apparently toying with the idea of paying producers to leave crude oil in the ground to prevent negative pricing in some areas of the country. So, that really is to say that I don't see oil investable right now until we see a timeline for when we might come out of this crisis. Right now, that's anyone's guess.

Greer: Well, Emily, let's talk airlines. United (UAL -1.30%) reporting a $2.1 billion loss, billion as in B, for the first quarter. Shares down around 4% at the time of our taping. Now, Emily, United says that it has applied for $4.5 billion in government loans and that's on top of another $5 billion in federal payroll grants and loans that it expects to receive. What do you make of United?

Flippen: It's not very often that we get stories about oil falling and then airlines also following, because one of the vital inputs for airlines is oil. And so, typically when the price of oil is low airlines are doing well, but this just shows the extent of the crisis that we're in. There is no demand for oil and there is no demand for airlines. United Airlines is the first airline to report, so it's a little bit unfair because we're missing the context of all the other major airlines, but it is to say the financial situation that these airlines are in are extremely dire. The reason why they're looking for so much federal aid is because they've been mismanaging their cash positions historically, taking on a ton of debt, buying back stock at all-time highs, it's really exacerbated a really difficult financial situation for these companies, United included.

Greer: So, Emily when you look at the airline industry going forward, do you think we're going to see even more consolidation? Because to the point you just made, I mean, I understand that some of the airlines have been mismanaged, but I also understand that it's really, really tough to run an airline during a pandemic. So, how does this shake out going forward?

Flippen: It's extremely challenging. The federal government and the average American consumer has a vested interest in two things: one, keeping airlines operating for travel needs. I mean, travel doesn't cease to exist in the future, we need airlines to provide a vital service, but we also want those airlines to remain competitive with each other. You know, it wasn't that long ago that airlines were essentially a national industry in the U.S. and prices were much higher because the industry wasn't competitive. So, the more airlines the better. We don't want to see airlines going out of business.

And the reason why airlines have been so reckless with their spending in the past is because they are acutely aware of the fact that they are a vital business, that the federal government and the American consumers wouldn't allow them to go out of business. It still is challenging for them, though. I think that they will likely get the aid that they're seeking for exactly that reason. I mean, it hurts the consumer, it hurts the average person and America way more when these companies go out of business than it will be to bail them out.

Greer: OK, Emily, I have asked you this question before, in fact, it was a few months ago. But the world has changed, so I've got to ask you again. Do you have a favorite airline stock?

Flippen: I don't really like fishing in lakes that have been so polluted like airlines have been. Is that a bad analogy?

Greer: No. We're going to go with it; we'll go with it.

Flippen: [laughs] That's great. I will say there is one fish that looks attractive to me, a well-managed airline, Southwest Airlines, ticker LUV, has been a really attractive and well managed airline, much better cash-to-debt position than all the other major airlines. Management has been much more open and transparent during this crisis than American, than United, than arguably Delta, but their financial position has just been much stronger than the others.

So, again, I'm not going out and dying to buy shares of Southwest, but if I was committed to buying in airlines, and I'm not saying I am, but if I was, at this point Southwest is what I'd be interested in.

Greer: OK, Emily, let's talk Facebook. A couple of interesting stories here. On Monday, Facebook releasing a map that shows how many people are reporting COVID-19 symptoms across the U.S. on a county-by-county level. Now, we should underscore that those are symptoms, those aren't necessarily people who have tested positive. The map will be updated daily and is designed to help health officials allocate resources and it's also designed to help officials decide what parts of society can be reopened and when. The data is gathered by Carnegie Mellon. And Facebook says that only Carnegie Mellon researchers see the individual survey responses.

So, Emily, this feels encouraging. It feels like this could be a nice -- I mean, we maybe, maybe, maybe could start to understand the spread of the virus a little more thanks to Facebook.

Flippen: [laughs] We had different reads on that story, I will say that. It's not a bad thing, more data is obviously better. But Facebook itself isn't collecting this data, they're very open about that, it's a survey done by Carnegie Mellon. And not only is survey not the best way to get a sense about the spread of this virus, but it's delayed, it's belated. I mean, Microsoft's Bing, for instance, has had a robust COVID tracker available online for weeks now, I think, maybe upwards of a month now, with way more granular data that goes down to further than the county level, tracks cases of fatalities, recovered. What I think is really interesting about Facebook's approach is that it's tracking symptoms.

So, the real value to me here isn't, if you're an average person trying to get a sense about the spread of coronavirus in your relative area, I think Microsoft's Bing COVID tracker is much better for that. But for people who are looking to get a sense about the spread of it beyond just those that have been tested, tracking symptoms is the best way to do that.

Testing in the U.S. has clearly not been up to par, so tracking symptoms, while not really great data for you to base your life upon -- don't be going out just because Facebook says that your county has less symptoms than others -- it is a great idea to track the sense about the spread of the virus for those who have no access to testing.

Greer: OK. But it sounds like you think I should contain my enthusiasm, because I think you might have just compared Facebook and Microsoft Bing, and do you know anyone who uses Microsoft Bing?

Flippen: [laughs] That's a really great point. I will say this, I have not used Bing for -- I mean, I don't think I've ever used Bing except for their COVID tracker. So, I will give props where props are due. Microsoft has done a great job in tracking that data, in my opinion much better than Google's Map. Google's Map is hilariously lacking insight and lacking detail in comparison to Bing's. But I do not use Bing to look at places to get food, [laughs] for instance.

Greer: But to your point, this does seem like a powerful combination. If you got Carnegie Mellon doing the surveys and doing the research and gathering the data, and then you have Facebook with its ubiquity, right? With its ubiquitous platform, doesn't that give you some hope?

Flippen: Ubiquitous/notorious, what's the difference, really? No, it does. Again, the more data that we have, the better. I will just say, tracking symptoms is different from tracking cases. And if you look at Facebook's COVID map, it really does lack detail, because survey results are inherently small and lacking in detail. A lot of the counties that Microsoft, for instance -- Microsoft's Bing tracker shows dramatic differences in number of cases -- show up in Facebook's COVID tracker as the same color, right? The same rate of symptoms, when in reality it's probably very different.

Greer: OK. So, you're saying, it feels like I need to kind of dial back my optimism.

Flippen: Well, it's too early to tell, but I'll be keeping my eye on both. How about that? Compare both of them to each other and use that to form your basis.

Greer: OK. Fair enough. Well, in other developments, Facebook on Monday introducing its Facebook Gaming mobile app. Now, Facebook says that more than 700 million monthly users already engage with gaming content. But Emily, this is a crowded space. We've got Amazon's Twitch, we've got Google's [Alphabet] YouTube, Microsoft's Mixer, just to name a few. What do you think about Facebook Gaming?

Flippen: Facebook always seems to feel like 10 to 20 years behind the curve. I don't know if that's my millennial opinion, but the fact that Facebook is just now coming out with a gaming app, it's like they're looking back in the past decade and saying, what's been big? Gaming. Maybe we should do something there. [laughs]

So, I wish I could say that I was surprised; I'm not. I will say that they're really late to the game. I mean, as you mentioned, Amazon's Twitch, Microsoft's Mixer, these dominate in-app purchase revenue right now. Facebook isn't even on the board. So, what they're going to have to do is one of two things, convince people who have been using different platforms to move to Facebook Gaming or cart out an entirely unique niche for just app-based social gaming for your connections. And maybe there's an opportunity there, right? But I think it's silly if they're trying to go up against a platform like Twitch or Mixer.

Greer: And, Emily, let's wrap up with the story that we mentioned at the top of the show. It is April 20th or 4/20. So, for those who are not well versed in the significance of 4/20, first of all, do tell.

Flippen: Yes. 4/20 is, I'll say, a cannabis holiday, if there is such a thing. I think, maybe the cannabis industry is a constant holiday for its core customers, but it became, kind of, a code for cannabis youth in the 1970s in California. Essentially it just became code for let's go out and let smoke, right? So, it's a long story about how it came to be the high schoolers, maybe a group of Grateful Dead fans -- if you're interested, I'd definitely recommend google searching it. But essentially what it means is now as an industry 4/20 is the day that everybody goes out and consumes their cannabis products; or at least it used to be before this pandemic.

Greer: OK. So, let's talk cannabis, let's talk about the future of the industry. Cannabis stocks have just gotten absolutely crushed over the last year. Cannabis, despite being legal in a number of states, still illegal under federal law, and that's what I want to ask you about, Emily. Does the economic crisis we're in and the pandemic, do you think it accelerates the timetable for legalization at the federal level?

Flippen: Short answer, no, I don't. I do think it depends on how protracted this pandemic will be. I think if the financial situation for a lot of these states becomes increasingly dire, then maybe that puts some winds in the sail of the legalization movement.

But we've seen challenges on the state level over the past year or so to get states that agree that cannabis should be recreationally legal, fight over the tiny details of how to implement that policy. And amid this pandemic, we're not only seeing a lack of legislation be passed on the state level, but a reluctance to make big statewide decisions when times are so troubling.

So, while the tax revenue from cannabis legalization could be really great for a lot of these states, I think, ultimately, the details and the process of trying to pass legalization measures will be extremely challenging. Again, it does depend on the state. If you look at a country state like Oklahoma, which was in desperate financial need of tax revenue, they legalized medicinal cannabis really quickly and really leniently, because they needed that revenue, they were in a horrible financial situation.

Other states like New Jersey wanted it to be legal, but didn't really need the tax revenue and proceeded to bicker over the details for a year and ultimately not pass any legislation. So, it depends on the state level, but I don't see the majority of states being in such dire financial stress, like Oklahoma was, to pass legislation as a result of this pandemic.

Greer: OK. So, with that in mind, if I'm an investor or a potential investor looking at cannabis stocks, what should I be watching going forward? Is there a single event or a trigger or something that you're looking at?

Flippen: Long term, obviously, federal legalization would be the single biggest event that any cannabis investor could hope for. It does seem like that isn't on the short-term horizon, what I would say is if you're interested in investing in the space and you don't have to be, you know, there's no reason to say that every investor should need to get some level of cannabis exposure the way they do healthcare exposure or tech exposure, but if you're interested look at the company's financial situation. All of that information should be available on their own websites, with the SEC, with EDGAR. That resource is available to you.

And most of these cannabis companies are in such a bad financial position that they don't even have enough cash to last them a few months, nonetheless through a pandemic. So, take the time to research the companies, understand their financial position more, how much cash they have, how much debt they have before investing.

Greer: Just to wrap up here, Emily. I confess that when we were Slacking about the show, I did some online research about 4/20, because I had wondered where the name came from. And, you know, there are so many competing stories about the 4/20 and whether it's legal code, but it sounds like the one that most people do land on is that it was the gathering time, 4:20 p.m., for some California students to engage in marijuana use. Do you think -- is that the explanation or is that still up for debate?

Flippen: I think it is. I also spend a little bit of time researching it and it is still widely debated. Obviously, the number 4/20, people say it comes from Bob Dylan songs. They're coming from the fact that it's the police code for smoking pot. But the true story, courtesy of The New York Times, seems to be that group of high school students, like you said, Mac, that gained traction when they then began to socialize with Grateful Dead fans. And then, in 1990, a group of Grateful Dead fans then started circulating flyers saying that everybody on April 20th at 4:20 p.m. should start to consume cannabis. And it really just caught fire since then.

Greer: So, I've got to ask, as we wrap up here, at 4:20 p.m., when you were in high school, what are you doing? What's your typical 4:20 p.m. activity in high school?

Flippen: [laughs] Well, I think school's over by that chance, which means that I was likely in debate club, preparing debate. I was not a particularly partaking high school student.

Greer: No, I knew, I knew, I knew that's why I asked you that question, because I knew you were doing something productive and constructive, unlike me, I got to say I was probably watching Gilligan's Island, which was just --

Flippen: Sounds productive to me.

Greer: It is. But 4/20 was, like, the part, it was the end of the show where you think they're finally going to get off the island and then they never ever get off the island. So, it's just crushing -- it's just absolutely crushing.

So, speaking of islands, the desert island poll. Over the next five years, Emily, you've got to own one of these stocks, let's give you a basket for oil stocks. So, you've got a basket of oil stocks, United Airlines, Southwest Airlines, Facebook or have about a basket of cannabis stocks.

Flippen: Well, the contrarian inside of me wants to say a company like Southwest. But speaking of the fact that it is 4/20 and I am the lead advisor of our cannabis portfolio, I will say, if that basket of cannabis companies are preapproved by myself, I think a basket of cannabis companies at this point really does make sense for a prudent, really long-term investor. The values that we're seeing today in the market are hilariously cheap in comparison to where they were just a few years ago.

Greer: And do you have a few names for that basket? I'm not going to hold you to this, but if you had, you know, a couple of big names?

Flippen: Yeah. Actually, all the big names I would recommend avoiding. I think most of the cannabis companies that the average investor has heard about are probably not worth investing in. I would advise people to look toward U.S.-based multistate operators that are in strong financial positions.

Greer: OK. Well, Emily Flippen, thanks for joining me.

Flippen: Thanks for having me.

Greer: As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, and we will see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Emily Flippen has no position in any of the stocks mentioned. Mac Greer owns shares of Alphabet (C shares), Amazon, Facebook, and Microsoft. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Delta Air Lines, Facebook, Microsoft, and Southwest Airlines and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
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Alphabet Inc. Stock Quote
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$101.42 (-0.01%) $0.01, Inc. Stock Quote, Inc.
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Meta Platforms, Inc. Stock Quote
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$139.07 (0.07%) $0.09
Halliburton Stock Quote
$29.81 (1.95%) $0.57
Southwest Airlines Stock Quote
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$32.54 (-1.36%) $0.45
United Airlines Holdings Stock Quote
United Airlines Holdings
$34.96 (-1.30%) $0.46
Delta Air Lines Stock Quote
Delta Air Lines
$30.62 (0.33%) $0.10
American Airlines Group Stock Quote
American Airlines Group
$12.73 (-1.09%) $0.14
Alphabet Inc. Stock Quote
Alphabet Inc.
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