What happened

Shares of Chesapeake Energy (OTC:CHKA.Q) are down 7.4% at 1:38 p.m. EDT on June 24, joining most other oil stocks in a day of heavy selling following the release of the U.S. Energy Information Administration's (EIA's) weekly petroleum data. At this writing, crude oil is taking a beating: Brent crude futures for August are down 5% to $40.49, and West Texas Intermediate futures are at $38.27, down 5.2%. 

So what

The EIA weekly petroleum report came as a stark reminder that oil markets are still well out of balance. Commercial crude oil inventories increased 1.4 million barrels last week, while the additional refined products that refiners made but didn't sell pushed total petroleum inventories up almost 4 million barrels. Crude inventory in commercial storage is now 17% above the five-year average. 

Gathering pipes near a pumpjack.

Image source: Getty Images.

Demand continues to be well below usual levels. The EIA reported that refiners supplied an average 17.1 million barrels per day of product to the market over the prior four weeks, down 17% year over year. 

In addition to another weekly report that indicated oil production continues to outpace demand, the stock market is in a big sell-off today over COVID-19 worries. Dozens of states are reporting big increases in the number of people with the disease, including several now reporting the highest number of cases daily since the outbreak began. This has investors selling in fear that the recent "reopening" of the economy could be impacted if state and local governments are forced to take measures to slow the spread of the deadly disease. 

Now what

At this writing, the SPDR S&P 500 ETF Trust (NYSEMKT:SPY) is down over 2.7% as investor sentiment has turned decidedly negative on COVID-19 worries. Oil stocks are feeling the impact particularly heavily due to the continued oversupply and low-price environment that has already caused numerous bankruptcies in the sector

Sadly, the writing is on the wall: Chesapeake is more likely than not to join the ranks of the bankrupt and potentially as soon as this week. The company has already skipped one $13 million interest payment, and is set to default if it doesn't change direction and pay it within the next few weeks. Once that default happens, Chesapeake will face a wave of defaults on the rest of its debt, and it would have no choice but to file bankruptcy. 

Chances are, the only reason it hasn't already filed is that it continues to negotiate with major bond holders on a prearranged bankruptcy deal. The next step would be to file for Chapter 11 and submit that deal to the courts for approval. 

When that happens -- and it's becoming far more "when" than "if" at this point -- common shareholders are very likely to get substantially wiped out. Simply put, unless you're willing and able to stomach a very, very high likelihood of big and permanent losses, today's sell-off isn't an opportunity to buy Chesapeake shares.