It’s still not time to buy oil stocks like BP (NYSE:BP).
There’s still too much supply on the market, and no demand. The situation has gotten so bad, the U.S. delivery hub in Cushing is now 70% full at the moment. Worse, “With demand down 30% worldwide, that leaves buyers of oil few options other than to stick crude in storage.”
Since there’s not a lot of room to store oil on land, companies are storing millions of barrels of oil on tankers at sea. That’s why oil is struggling to stay above $12 at the moment.
Should the situation worsen, we could even see -$100 oil.
“Will we hit -$100/bbl next month? Quite possibly,” notes Mizuho analyst Paul Sankey. “We have clearly gone to full scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery.”
For those reasons alone, I would stay away from oil stocks like BP.
There Just Isn’t Enough Demand for Oil
Granted, BP is sitting at multi-year lows, and appears to be a “blood in the street” opportunity.
Unfortunately, there’s still far too much uncertainty going forward. For one, thanks to the novel coronavirus the International Energy Agency notes, “Even assuming that travel restrictions are eased in the second half of the year, we expect that global oil demand in 2020 will fall by 9.3 million barrels a day versus 2019, erasing almost a decade of growth.”
At the same time, supply is only increasing.
In fact, oil inventories increased by 19.25 million barrels for the week ended April 3, says the Energy Information Administration (EIA). Worse, for the week ending April 10, U.S commercial crude was up to 503.62 million barrels. “The build was the largest ever on record, eclipsing the previous record-build of 15.18 million barrels realized the week prior,” says S&P Global Platts contributor Chris van Moessner.
In addition, “Despite the forthcoming OPEC+ production cuts, more production needs to be cut — particularly in the US and Canada to avoid tank tops by June,” S&P Global Platts’ global head of analysis Chris Midgley said.
Falling Oil Is Weighing Heavily on BP Stock
The drop in oil demand, coupled with far too much supply is weighing on BP.
“Our industry has been hit by supply and demand shocks on a scale never seen before, but that is no excuse to turn inward,” BP CEO Bernard Looney said. “At the same time, we are taking decisive actions to strengthen our finances – reinforcing liquidity, rapidly reducing spending and costs, driving our cash balance point lower.”
While BP will maintain its dividend, profits just fell 66%. Net income of $791 million in the first quarter fell from $2.36 billion year over year. All thanks to lower prices and a sharp drop in demand. The company also says it faces “an exceptional level of uncertainty.”
“The real situation that we have here is a fundamental situation of supply and demand,” Looney added. “Demand in the second quarter, we think, will be down around 16 million barrels per day worldwide this year. And that’s about five times the previous demand destruction which we saw in the global financial crisis in 2008 to 2009.”
In short, conditions will only worsen at the moment. Even with OPEC cuts, prices will remain low unless we can start burning off the excess supply. Until the situation shows some signs of improvement, it’s best to avoid oil stocks like BP, near-term.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
