Oil prices entered negative territory in afternoon trading on Monday for the first time. This means that the person selling the contract would pay the buyer to take delivery of the oil.
If the most watched oil price gauge is literally worthless, is it time to drain the oil stocks? Probably not, especially if you hold stocks that can generate enough cash to meet their obligations until the end of next year. The worst of the oil fusion will finally be over, and the world will need oil to fuel the healing of the coronavirus.
However, the demand for oil is not drying up. Futures that expire in the following months are still trading at more than $ 20 and, in some cases, more than $ 30. The restrictions on Covid-19 will eventually be relaxed and businesses and consumers will buy petroleum products again.
“Negative oil” bets apply to a very small slice of the market. The overwhelming majority of oil contracts in progress today represent bets that oil will exceed $ 20. At the start of the weekend, there were only 108,000 open contracts for May futures, up from 538,000 for June and 330,000 for July, according to the Chicago Mercantile Exchange. Most investors are betting that crude will trade at more than $ 20 by June and more than $ 30 by September. And the first-month contract for Brent crude oil, the international benchmark, stood at $ 25.57 on Monday.
Oil companies, especially in the United States, are counting. No one can still make money at prices below $ 40. There could be dozens of bankruptcies before the end of the year.
But companies that have managed their debt well may experience a rebound as more producers exit the market and the balance between supply and demand is restored.
“Today’s price movement gives the impression that oil is killing the kidney,” said David Winans of PGIM Fixed Income. “A very painful decision, but one that cannot last long, because the producers are cutting the wells as we speak. “
Today, the world may only need 75 million barrels of oil a day to keep the economy running. By the end of 2021, however, he will likely need 100 million barrels a day or more, and someone will have to supply all of this oil.
Among the companies well positioned to succeed in the coming years,
(CVX), which reduced capital conservation expenses. “Chevron in an environment of $ 30 a barrel Brent offers the lowest net debt / Ebitda [earnings before interest, taxes, depreciation and amortization] World Super Majors, “Goldman Sachs analyst Neil Mehta wrote last week. He evaluates the actions at Buy.
Another title that is now attracting positive attention is
(SLB), the world’s largest petroleum services company. Schlumberger has suffered from reduced corporate investment budgets. But he has enough long-term international contracts to be able to persevere in the next 18 difficult months. The company’s decision to cut its dividend on Friday gives it more cash to honor short-term debt.
Write to Avi Salzman at [email protected]