On April 8, I wrote that WTI crude was headed to $5 per barrel. At the time, it was trading at $25.09 per barrel.

But that turned out to be a conservative estimate…

Now it’s trading around $14.50 per barrel – which is still a stark recovery from the negative $37 it hit just days ago.

COVID-19 has put a massive drag on crude demand. And that’s in the face of far too much supply.

Throw in that global crude storage is near its maximum and – voila! – you have a recipe for crude’s epic collapse.

A World of Hurt for U.S. Producers

Oil prices did a head fake two weeks ago. That’s when Saudi Arabia, Russia and other members of OPEC+ announced a historic production cut of 9.7 million barrels per day (bpd) for May and June.

But here’s the problem: Crude demand has dropped by an estimated 29 million bpd in April. We haven’t seen demand this low since 1995.

For the second quarter, demand is forecast to be 23.1 million bpd below last year’s levels. In fact, it’s expected to fall by an average of 9.3 million bpd for all of 2020.

This has had a huge effect on U.S. producers. As I mentioned in last week’s article, 215 oil and gas producers have filed for bankruptcy since 2015. Together, they amassed $129 billion in debt.

And more dominoes are going to fall. In fact, on April 1, Whiting Petroleum Corp. (NYSE: WLL) filed for bankruptcy.

A year ago, its shares were trading for $29.35. Today, they’re trading for just $0.34…

Ouch.

Before the coronavirus hit, the credit rating firm Fitch Ratings predicted a 2020 default rate for U.S. drillers of about 7%. After COVID-19, Fitch Ratings more than doubled its estimate to 17%.

That represents an additional $32 billion of high-yield debt that could vaporize.

And it’s only going to get worse throughout the remainder of the second quarter. Drillers are being forced to shut in production.

Customers are declaring force majeure to get out of oil contracts. And with storage filling up fast, U.S. producers have no choice but to dial back production.

With little or no money coming in, debts loom large on strained balance sheets. But Whiting isn’t the only driller in dire straits.

Chesapeake Energy Corp. (NYSE: CHK), California Resources Corp. (NYSE: CRC) and Ultra Petroleum Corp. (OTC: UPLC) have all hired restructuring advisors to renegotiate debt with creditors.

And their stocks have all taken a serious hit in the last 12 months…
There’s a good chance that none of them will be able to stay current on their debt payments.

And company bondholders aren’t making out much better. Whiting has a bond that has dropped in value by 90% since mid-February. It’s now worth just $0.06 on the dollar.

A big wave of bankruptcies is coming in the oil sector. Make sure you – and your money – stay far away from it.

Stay safe and healthy,

Dave