Last week was a bad one for crude oil as the black gold closed more than 9% lower on Friday alone after press reports confirmed that Russia refused to participate in additional production cuts that OPEC proposed the day before. The cartel floated the idea of reducing the world’s oil output by 1.5 million barrels per day (mbpd). Still, Russia rejected this idea, preferring to stick to the existing output reductions that expire in March.
Additional downward price pressure came from the added uncertainty that the existing cuts will be extended beyond March after Russian Energy Minister Alex Novak said members are free to pump what they like from April 2020. Comments such as these raise the prospect of a flood of oil coming back to the market at a time of declining demand due to Corona Virus related uncertainty.
More bad news came when oil field service company Pioneer Energy Services (OTC: PES) filed for Chapter 11 bankruptcy. According to Standard and Poor’s, Pioneer defaulted on approximately $300 million worth of debt. Separately the rating company reports that as of March 5th, the global corporate default tally reached 20, which is the same number as of this point in 2019. Despite recent weakness in the oil price, it is not the energy sector that is leading in corporate defaults. S&P reports that “the consumer services sector (consisting of retail and restaurants and consumer products) leads the 2020 default tally with eight.” More pain is likely to emerge here as the full effects of the spread of the Corona Virus unfold.
Energy is not the sector to be invested in 2020. Data from Finscreener.com shows that the Energy Select Sector SPDR Fund (AMEX: XLE) is the worst performer of the S&P 500 Sector ETFs, down over 29% in 2020 alone and is underperforming the broader index by over 20%. The next worst sector is financials, who are underperforming the broader market by 9%. We have been cautious about the energy sector for some time now. (For more see, “Is The Energy Sector Running on Fumes”).
Global economic growth is under threat, and energy is one of the sectors at the front end of the line since it is highly dependent on demand. Anecdotal stories are coming to light about Chinese off-takers refusing shipments and using “force majore” clauses in their contracts to end buying commitments. Delayed purchases are adding to the backlog of supply. Look for more downward price pressure, more bankruptcies, and more pain in the oil patch over the next few fiscal quarters.
Related: How to Invest in a Recession
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