Now is not the time to buy oil and gas giants like BP (NYSE:BP) stock.
While $20 oil may appear unsustainable, the price could fall even more thanks to decimated demand and a price war between Saudi Arabia and Russia. From here, should tensions escalate, oil could pull back to a low of $10.68, which we haven’t seen since 2001.
Granted, it’s tempting to think “we’ve had this monster decline and it’s ripe for the picking,” but we really need to see more signs of stabilization with oil names. While BP stock will most likely survive the pullback, now is not the time to venture into the stock for two key reasons.
Reason No. 1 – The Oil Price War between Saudi Arabia and Russia
On the face of it, an oil price war in the middle of a global pandemic is absurd.
Russia decided to blow up a three-year old pact to manage global oil supplies and refused Saudi Arabia’s proposed cuts. The Saudis then cut selling prices for oil and announced plans to flood the oil markets with another 500,000 barrels a day. Both are now stuck in a game of chicken, seemingly without a care in the world that oil has now sunk from $50 to $20 a barrel.
Both sides believe they can withstand a prolonged price war as the world burns.
Russia for example relies much less on oil revenue, says The Wall Street Journal contributors’ Benoit Faucon, Summer Said, and David Hodari.
“That isn’t the case for many of Saudi Arabia’s fellow OPEC members, some of whom are trying to intervene and bring back both sides to the negotiating table.” That includes the U.S., which is guaranteed to lose its spot as the world’s top oil producer. Already, oil producers in the U.S. have cut budgets. Capital investments have been put on hold. Workers have been laid off.
However, the impact of the price war pales in comparison to demand destruction.
Reason No. 2 – Demand Has Been Destroyed by the Coronavirus
“We see in this coming month of April what could be a 20 million barrel a day decline in oil demand. It’s unprecedented,” Dan Yergin, energy expert and vice chairman of IHS Markit said. “That’s six times larger than the biggest downturn during the financial crisis period.”
With most of the world on lockdown with the coronavirus, demand has crumbled. We’re also running out of places to store all the oil supply.
According to Fortune contributor Katherine Dunn, “Analysts at Rystad Energy, the oil consultancy based in Oslo, Norway, estimate that the world is likely to run out of storage at current production rates by April, estimating earlier this week at 76% of the world’s storage is already full. In some regions, like Western Canada, storage could be full by the end of this month.”
The Bottom Line on BP Stock
Despite the chaos, BP is still confident, and will reduce capital and operational spending to weather the storm. “BP is strong and, importantly, we have navigated challenges like this before. We know what to do,” added CEO Bernard Looney.
However, with a good deal of negativity, I’d still avoid oil in the immediate term. Once we see thawing tensions between Russia and the Saudis, and we begin to see the coronavirus cool off, then we can consider buying top “blood in the street” oil stocks. Right now, I’d avoid them all.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.