As traders at Nadero Wealth Management watched on during the first few hours of trading last Monday, April 20th, the May oil futures steadily edged lower, widening the gap between that contract and the June contract, which, while weak, still ended the day at more than $20 a barrel. But with expiration on the way on Tuesday the 21st, the selling accelerated in the last two hours, with oil finally hitting negative territory roughly 20 minutes before the close of trading. Nadero Wealth Management reported that investors were selling the May futures contract due to expire on Tuesday in a series of waves. At one point, the contracts hit negative $40. When the trading stopped, crude oil had ended the day at a negative $37.63 a barrel, a decline of some 305%, or $55.90 a barrel.
Many, including Nadero Wealth Management, predicted that oil prices would crash, but few could have suspected how spectacularly. For those who have been reading and following us, we have argued that Russia bolting out of OPEC would result in a price war with Saudi Arabia – with dwindling oil prices hitting Saudi’s most reliable ally, the US. Now, with oil prices plunging to their decades’ all-time lows – America will find it cheaper to import rather have them produced. At these levels, shale oil producers in the US will go bankrupt opined Nadero Wealth Management. The American oil industry faces a doomsday scenario.
Putin 1. Trump 0.
After last Monday’s sell-off with oil futures going into negative territory, “a first in history,” according to Nadero Wealth Management – prices will likely normalize between the US$20 to US$30 a barrel – dampened by low demand due to a halt in economic activity and production – thanks to the corona pandemic and subsequent near-global lockdown.
A US$20 a barrel oil environment will push oil exploration and production companies to file for bankruptcy by the end of 2021 believes Nadero Wealth Management. And at US$10, almost all oil production and exploration companies will have to file for bankruptcy and consider selling off.
American Petroleum companies going bankrupt could mean workers being laid off and unemployment levels reaching high numbers. That is not a good situation in an election year. What is worse, with an economy on lockdown, there is no available sector to cushion the impact of a failing oil industry in the US as almost all industries are in free fall to a lesser or greater degree.
Trump’s mantra has always been to bask on the performance of a bullish stock market. Now that industries are falling and the markets are dipping to new lows – what is there economically to boast about?
With dwindling oil prices – market watchers and investment professionals at Nadero Wealth Management are on the lookout for that next falling domino. Once revered as pillars of corporate strength and financial stability, American oil companies now are feeble and about to crack. American frackers may have rebounded from the 2014 to 2016 oil crash, but the situation now is worse, and the US shale industry could be scarred permanently. The winners? Russian oil companies.
American oil companies might see a significant beating, and the two options for them are to survive with a loss or file for bankruptcy. The Trump administration has no clear policy on supporting oil companies (compared to how the Bush Administration supported the Big 3 Car companies). Buying dead beat oil stocks may not offer long term gains. Neither is it a dividend play. With years of excessive spending and oversupply, investors only saw horrible returns and investors are getting tired of it. That was already the sentiment even before the great oil crash of 2020.