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  • Roger S. Conrad

The Name of the Game is High Grading

By Elliott H. Gue on Mar. 23, 2020

Unless there’s a monster rally in the last 10 days of March, oil prices are headed for their worst one-month performance in history. In fact, the decline so far is almost 17 percentage points greater than the previous record of -33 percent in October 2008.

Then as now, energy prices have been hammered by the growing likelihood of a global demand shock. That time around, the cause for concern was the Financial Crisis, which then had unknown dire consequences for economic growth. This time, it’s COVID-19 and its highly uncertain eventual impact on human health and the global economy.

Oil prices, however, simultaneously face a supply shock, as Saudi Arabia ramps up production even as demand comes under pressure. A similar move by the Saudis in 2015 was enough by itself to drive US prices down to $26 and change. This time around, combined with the demand shock, we now see a probability of oil prices in the mid-teens before there’s a hard bottom.

It’s fair to say that energy stocks have taken these negative developments very hard. The result is even the sector’s bluest blue chips have taken it on the chin.

Never in their long history, for example, have shares of Enterprise Products Partners (NYSE: EPD) yielded as much as 12 percent. Yet at one point last week, they were priced to pay out more than 15 percent. Super majors Chevron Corp (NYSE: CVX) and ExxonMobil (NYSE: XOM) raised their dividends more than once in the 1998-2002 period, a period when oil prices actually broke under $10 a barrel. Yet Chevron is now priced to yield nearly 9 percent and ExxonMobil over 10 percent.

Not even Saudi Arabia can afford $20 per barrel oil for long. Neither can Russia, whose refusal to cut output apparently led to the Saudis’ decision to turn on all the taps. That means both countries are eventually going to come back to the bargaining table, possibly sooner than second half 2020 if President Trump is able to follow through on his recent pledge to work a deal “at the appropriate time.”

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor