When you follow the markets for a living, you think you’ve seen it all. Then you look at the stock chart of Chesapeake Energy (NYSE:CHK) for the week of June 7-12 and you realize there are still secrets the market won’t give up. CHK stock climbed 64% on June 7 only to give up nearly all those gains the very next day.
And this trading activity was after the company had stated in May that it was likely to declare bankruptcy.
Let’s start with the obvious. Chesapeake is likely to declare bankruptcy any day. It has an interest payment due on June 15 and it’s unlikely to have the cash on hand to pay that. So that means a default is likely.
And once the company declares bankruptcy, the stock is likely to go to zero.
Why did the stock go to the moon and back in one wild week? Matt McCall provided this potential explanation in a recent InvestorPlace article:
Neal Dingmann of SunTrust Robinson attributed the roller coaster to a flurry of investment activity among retail investors. He noted that many investors were also closing out short positions on CHK stock, which, together with the retail interest, ended up tripping algorithmic traders, which automatically began buying the stock.
But let’s say that Chesapeake can somehow stave off bankruptcy. Even in this fantasy scenario, the fundamental issues surrounding the oil market give the company no meaningful path to growth.
Fundamentals of Oil Remain Out of Whack
The problem with investing in oil stocks right now is that the stocks aren’t responding to a “normal” supply-demand imbalance. The world is saturated with oil right now. And even with the economy reopening at a faster pace than some imagined, oil inventories continue to climb.
On June 10, the U.S. Energy Information Administration gave its weekly inventory report, and it showed an inventory gain of 5.7 million barrels. This was much greater than the 1.45-million-barrel climb that was expected.
Keep in mind, the only surprise in the report is that the surplus was larger than expected. Analysts still expected a surplus. And the continuing build is a reminder that the novel coronavirus has done incomparable damage to the world economy.
Demand Will Take a Long Time to Return
The supply imbalance will likely take a long time to work through because demand is likely to remain muted even as the economy reopens.
First, there’s the unemployment situation. The May jobs report gave the oil market a brief shot in the arm. However, the U.S. Federal Reserve Chair Jerome Powell threw cold water on that idea by suggesting that unemployment rates would still be around 10% by the end of the year.
But there is also likely to be a new normal for those that are continuing to work through the pandemic. Companies like Twitter (NYSE:TWTR) and Square (NYSE:SQ) are allowing employees to work from home for the rest of the year. And many other companies are issuing similar policies for at least the end of 2020 and/or until there is a vaccine or proven treatment.
Now let’s be clear. The number of people who can work from home may be very different from the number who actually will work from home. This goes beyond a simple Myers-Briggs assessment, there are some jobs that have to be performed in an office, or in the field.
Nevertheless, there’s ample evidence to believe that many businesses are beginning to realize that it’s not essential to their daily operations to have their cubicle farms fully stocked. And there are some workers who are discovering that they like the work-life balance that comes from the absence of a daily commute.
Investors Are Gambling With CHK Stock
Trading apps like Robinhood may be a vehicle for investors to get their gambling fix. This was echoed by Mark Travis of Intrepid Capital who has equated the current move toward risk-on trades as a form of gambling. “With no sports right now, people have turned to day trading as their new sport,” said Travis. “There’s a lot of speculation in the market now.”
I voiced a similar argument in my last article about Chesapeake Energy. And I have to admit, one of my first thoughts when I saw CHK stock surging higher is to look at Robinhood. However I was pleasantly surprised to see that Chesapeake Energy is still not one of the 100 most popular stocks on the app.
But that means that another group of investors, ones that should know better, are the ones that are taking a risk on Chesapeake Energy. I hope for their sake Dingmann is right and the unexpected rise in CHK stock was due to sensitive algorithms. Because, even in their wildest dreams, investors have no reason to get anywhere near CHK stock.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.