Pain in the oil patch is expected to aggravate on a host of reasons, ranging from the coronavirus threat, OPEC+ producers’ inability to crack an output cut deal to Saudi Arabia’s announcement of pumping more oil.
The liquid commodity slumped more than 20% at the start of the week, recording the worst single-day decline since the start of the first Gulf war in 1991. Though the commodity staged a recovery on Mar 10, with United States Oil Fund LP (USO - Free Report) adding about 11%, the commodity lost 1.7% after hours.
After talks with Russia fell apart, Saudi Arabia’s shocker of a decision to increase crude output starting next month caused an oil crash on Monday. Russia disagreed with Saudi Arabia’s proposed plan to cut production to manage the impact of coronavirus.
Notably, the current output cut program will expire at the end of March, implying that OPEC+ can produce as much oil as it wants beginning Apr 1 (read: OPEC Output Cut Extended to 2020: Will These ETFs Gain?).
Markets to be Flooded With Oil
Saudi Arabia now intends to raise oil output by about 12.3 million barrel per day, as a response to the breakdown of the OPEC+ alliance with Russia. Saudi Arabia also cut its export prices by $6 to $8 to encourage buying among refiners.
This will definitely trigger a price war in the oil market. Saudi Arabia is preparing for a budget that considers $12-$20 oil per barrel. The government is also apprehending an extreme scenario of oil slipping below $10 a barrel.
Russia, one of the world’s top producers, also hinted that it could boost output by 0.5 mb/d. It also indicated that it could survive with low oil prices for six to 10 years. Russia probably seeks to win back its title of the world’s largest oil producer that it lost to America in 2018. However, Russia is now open to talks.
Meanwhile, the demand side is also shrinking. The International Energy Agency warned that oil demand will likely decline in 2020 for the first time since 2009.
Will U.S. Producers Cut Output?
Markets are now wagering on output cut by U.S. producers in the range of 1-2 mb/d. Immediate announcements of shale production cut strengthened the bet. Goldman Sachs predicts $20 Brent oil “with possible dips in prices to operational stress levels and well-head cash costs near $20/bbl.”
Bankruptcy fears have engulfed the oil patch, leading the SPDR S&P Oil & Gas ETF XOP to its lowest price on record. Pioneer Natural Resources PXD was down 37% on Mar 9 and Occidental Petroleum (OXY - Free Report) lost 52% on Mar 9, per CNN.com. Occidental, however, announced an 86% dividend cut.
If oil prices hover around $30 per barrel, total capex could decline by $100 billion this year and by an additional $150 billion in 2021, according to Rystad Energy, as quoted on oilprice.com (read: 5 Energy ETFs & Stocks That Gained From Rebound in Oil Price).
Cenovus Energy (CVE - Free Report) cut capex by 32%. Ring Energy (REI - Free Report) said it would halt drilling until oil prices recover. Ovintiv OVV retreated about 70% on Mar 9 though it rebounded sharply the day next. The oil company would slash spending to sustain free cash flow, per oilprice.com.
Energy ETFs That Lost the Most on Black Monday & Rebounded Immediately
SPDR S&P Oil & Gas Exploration & Production ETF XOP –Down 36.9% on Mar 9, Up 21.5% on Mar 10
SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) – Down 33.7% on Mar 9, Up 1.4% on Mar 10
VanEck Vectors Unconventional Oil & Gas ETF (FRAK - Free Report) – Down 33.5% on Mar 9, Up 6.9% on Mar 10
VanEck Vectors Oil Services ETF (OIH - Free Report) – Down 32.2% on Mar 9, Up 4.4% on Mar 10
iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) – Down 32.0% on Mar 9, Up 4.2% on Mar 10
Though the oil patch strengthened on Mar 10, the uptrend should not last until and unless there is an end to the Saudi-Russia’s ‘pump-at-will’ program. So, investors can take a look at the following inverse ETFs. These could benefit, if oil prices keep struggling in the coming days.
ProShares UltraShort Bloomberg Crude Oil (SCO - Free Report) – Up 51.2% on Mar 9, down 21.9% on Mar 10
DB Crude Oil Double Short ETN (DTO - Free Report) – Up 40.8% on Mar 9, down 9.3% on Mar 10
Direxion Daily Energy Bear 3X Shares (ERY - Free Report) – Up 60.47% on Mar 9, down 14.3% on Mar 10
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