Around the world, stay-at-home orders and travel bans have slowed transportation to a halt. Photos of empty roads during rush hour in major cities have circulated on social media, government orders have halted cruises, vacations, and other non-essential trips, and people are considering whether to postpone retirement.
The impact of a slowed-down world, along with an oil-price war between Saudi Arabia and Russia that flooded the international market with too much crude, has hit the oil industry hard. Crude oil prices fell to more than -$37 per barrel in April, and oil stocks have dropped almost 70 percent in 2020, which is a 20-year-low for Brent and West futures.
While the sector has made a slight recovery from its rapid freefall, stock prices are still low. The question remains whether this is a good time to invest in the oil and gas sector. Here’s what you need to know:
Crude oil prices reached new lows in April, but oil is still a significant part of the world economy. The renewable fuel market is gaining more of a foothold in the energy and transportation sectors. However, diesel, gasoline, and other oil-based fuels will continue to have a place in the markets for many years.
In addition, the crude oil market has not collapsed permanently. It has been put on hold as the need for commuting, traveling, and shipping have slowed down. Eventually the world will begin to reopen, as it already is in much of China, and the demand for fuel will rise. Whether fuel demand will return to pre-pandemic levels is unknown, but it is certain that some demand for oil will be restored, at least for the foreseeable future.
Should You Invest?
Is now the time to massively invest in a down market? The question is complicated, as oil companies likely will fare differently during the pandemic. Some will likely go out of business. An investment in a failing company will result in the loss of your investment. Investors considering an investment now in an oil company also will want to consider short- and long-term issues facing the industry.
Even though renewable fuels are eating into the crude oil market share, the industry will rebound in the short term. People will start driving again, and travel and shipping will resume as economies reopen and commerce ramps back up. Increased demand at any level will push oil prices—and stock values—up from their current prices.
If you choose to invest in oil companies now, the question will be which companies are on a firm financial footing. Investing in companies that are well-managed and capitalized could result in a short-term payoff when oil prices rise.
Long-term Outlook Is Grim
Whether to invest long-term in oil companies is a murkier question. Analysts say the market was already on an overall downward trend before the coronavirus shutdown reduced demand and led to historic declines. In addition, government and corporate actions regarding oil supplies have created a worldwide glut of oil.
Saudi Arabia, for example, has historically served as a stabilizer in the world oil market. In early April, it planned (along with the United Arab Emirates) to significantly increase oil production and use more natural gas as a country in an attempt to make more oil available on the market. In February, Saudi Arabia exported more than 43 percent more barrels of oil than the month before and had plans for even bigger exports in the months ahead.
Now, the oil market is so saturated with oil that the industry doesn’t know where to store it. For oil companies short on cash, this could be problematic because they can’t sell the oil they already have. As a result, some independent oil companies are struggling. Whiting Petroleum filed for Chapter 11 bankruptcy in April, and if the bankruptcy court approves, shareholders will keep only 3 percent of the company, losing 97 percent of their investment. Chesapeake Energy hired bankruptcy lawyers and began restructuring in March—before the market bottomed out.
Some analysts also warn that traditionally conservative oil investments, such as pipelines, may no longer be safe either, as production is disrupted and demand is low. This middleman industry could struggle as companies find themselves with pipelines filled with oil that no one wants to buy. Pipelines, especially those connected with weaker oil producers, could be in trouble.
Many analysts don’t see a bright side for the oil industry’s long-term prospects. Saudi Arabia traditionally has reduced production to help control the market. However, at this point the flooded market may be irreversible unless a majority of the world’s oil producers also decide to cut back.
With this in mind, investors should be wary of investing resources into any companies involved in oil production, drilling and fieldwork, pipelines, and selling components such as drilling pipes. Large, diversified companies such as Shell and Phillips 66 may survive. Unfortunately, even they may fall victim if the world makes a slow recovery from this economic crash.