In this video, Eddie provides a concise yet comprehensive analysis of the unprecedented negative WTI futures price observed in the May contract and its broader implications. He explains how the COVID‑19 demand shock, combined with a Russia‑Saudi price war and severe storage constraints at Cushing, Oklahoma, created a glut that forced speculators to pay producers to take oil off their hands. Eddie outlines the resulting steep WTI futures curve (sub‑$35 through 2021) and contrasts US shale breakeven costs (~$40/barrel) with lower Russian/Saudi costs (~$15‑$20), highlighting the vulnerability of many US shale firms. He identifies potential winners—large integrated majors like Exxon and Chevron and financially strong shale producers with high EBITDA‑to‑interest‑coverage ratios (e.g., Rattler, Colon)—and losers, including distressed shale companies filing Chapter 11 (Whiting Petroleum, Chesapeake, Denbury) and those in the lowest quintile of coverage. The video also examines the ripple effects on the banking sector, noting over $200 billion of energy‑related loans, rising credit provisions at major banks (JPMorgan, Goldman Sachs, Citigroup), and the risk of a broader financial strain. Finally, Eddie connects these industry stresses to macroeconomic fallout: massive job losses, a projected 30‑40% Q2 GDP decline, reduced consumer spending, and a deepening recession. The presentation is analytical, cautionary, and explicitly states it is not investment advice.
Chapters
Hi guys, Eddie here. I just wanted to record a really quick video to discuss oil prices going negative and what this means for oil companies in the wider economy. So today we'll discuss the negative oil price for the first time ever, what this means for oil companies. We're going to discuss something called the WTI futures curve, and this is sub-$35 all the way out till 2021. We're going to discuss some potential winners and losers from the oil price crash that we've seen and what— and basically how it happened. So obviously the coronavirus has led to the world economy grinding to a halt, and this has led to a huge demand shock for oil, leading to the price falling very dramatically. Also forming the two-pronged basically trigger was the Russian and Saudi Arabians triggering a price— price war that basically led to them refusing to cut their production to support the price of oil. The US needs oil trading at around $40 a barrel, so they're going to suffer quite dramatically from this lower oil price persisting. So how is it possible for oil to go negative? I thought a long position was meant to be capped at zero, like owning a house, right? So this actually occurred in the May futures contract with expiry today. And this is basically due to the glut of shale producers and the glut of oil, much to the annoyance of the Saudi Arabians and the Russians. There's basically nowhere to store this oil. So this was the physical delivery of oil to Cushing, Oklahoma. Around 98% of the futures market is speculative, so they don't actually want physical delivery of this oil. Okay, so what you had yesterday was investors and speculators, traders, actually paying people up to $40 to take this oil, these barrels of oil, off their hands. And there was talk basically whether this would spread into the June contract, and it certainly has. So we've seen today US oil down 31%, and we've actually seen oil in the June contract, uh, hitting a low of $11 a barrel. Oil was trading at $63 a barrel in just January. Obviously we've had the coronavirus, which has led to huge demand shock, but plus these storage, uh, basically situations leading to the price of oil falling dramatically. There's also a very popular oil exchange traded fund that basically holds the underlying assets of oil. This may be forced to liquidate as a result of these price movements, which may exacerbate, uh, the price falling even further. These storage problems, um, and the lack of demand from coronavirus are likely to persist later into the year, into June, July, and August. So we might be seeing this persist into the July and August contracts also. So what happens if this US shale goes bust? So obviously oil companies produce oil, so the price falling puts pressure on their margins and will lead to lower profits and potentially lead to bankruptcy. What we've seen over the last 4 weeks, we've seen 22 million people in the US lose their jobs, okay, according to the jobless claims data. This has wiped out all of the jobs created since the global financial crisis. So these oil companies companies basically going bankrupt is going to lead to even further mass unemployment, which is going to put further strains on the US economy, put further strains on the deep recession that we're already in and prolong it. Okay, this is going to lead to global growth being revised down further. Q2 GDP in the US is forecasted to up to— to be down up to 30 to 40%. And just remember, when all these people are losing their jobs, consumer confidence Consumer spending goes down, and consumer spending generally makes up 70% of GDP. So as this consumer starts to roll over, this is gonna lead to GDP being further and further revised down. So what does this mean for US shale? Okay, so they were already struggling with diminishing profit margins, and few US firms can actually withstand this price war. So they've been battling producers for lower costs, and this oil market rout that we've seen, where oil prices literally trade negative, have basically reduced the price of oil below their cost of production. And like I referred to, US shale breakevens is around $40 per barrel. Russian and Saudi is probably around $15 to $20, so they can withstand this price war a little bit longer. What we can see here is the WTI futures curve. So this dire outlook in the industry will actually make it even more difficult for firms basically trying to go bankrupt. This futures curve is actually sub-$35 all the way to 2021. I know this chart is showing even further out to 2030, but remember, the breakeven is $40. So lots of producers of oil in the shale industry will not survive. This reflects a basically a severe long-run demand destruction for oil. And the back end of the curve here is actually even scarier than the negative prices being traded today. These, uh, basically firms that are going to go bankrupt, they— it's got so bad that they can't even file for a Chapter 11 because this is a reorganization where basically they reorganize their capital structure. So debt holders basically that have lent money to this company would normally swap their, swap their debt to equity, but they don't even want the equity. So this is how bad it's got. So there are some opportunities in the US oil name. So what I've pulled here is some companies that I'm definitely looking at, and this is not investment advice, but these are some names you should looking at. These are the top quintile of US energy producers that have an— in the EBITDA to interest coverage ratio space, aka they have enough cash to cover their interest payments up to lots of times over in the top quintile. So there's— these are some good names like Rattler, Colon. They're in a good financial position in terms of their interest coverage ratios. Some names you may recognize: Exxon and Chevron. These may, uh, will most likely benefit just because of their scale, and they could actually benefit from the fire sales that may take place from these smaller names actually going bankrupt. There's going to be some companies that go up in flames. So Whiting Petroleum has been the first producer to file for a Chapter 11 bankruptcy. Again, this is a reorganization of the capital structure rather than a straight liquidation. Other names include Chesapeake Energy, Denbury, etc. But these names here are in the opposite of the slide that I just showed you. These are in the lowest quintile for EBITDA to interest coverage, aka they don't have cash to cover their near-term interest payments. So these names are most likely going to go bankrupt. So there could be some good opportunities here, but there may also be some good opportunities for names like Chevron and Exxon to acquire these kind of companies as they go through a fire sale. So this is not just going to impact the oil industry Who lends to the oil industry? It's the banks, right? So I've got JP Morgan here, and some may think of it just as an investment bank, but again, all of these banks, both large, medium-sized, and small in the United States, are primary lending facilities. Okay, so who have they lent to? Chances are it's going to be the airlines, the hotels, the leisure industry, but again, the oil industry, right? So the industry is estimated to own more than $200 billion to these banks— the energy industry, that is. Through loans backed by oil and gas reserves. So as revenues plummeted, assets have declined in value. So some companies are actually saying they're being going to be unable to repay. So you've seen from the earnings season, JPMorgan, the largest bank in the US, posted 69% year-on-year profit drop from the quarter last year. But it's also increased its credit provisions. What are credit provisions? Credit provisions are basically a pot of money that you keep aside as a bank for delinquent or bad debt. Where is this bad debt going to originate from? It's going to be the airlines, the energy industry, etc. So these oil companies going bankrupt is going to have severe implications, and this could flow through into contributing towards a financial crisis. Different to 2008 where the banks were the problem, it's actually the clients of the banks that are the problem this time. And similar banks like Goldman Sachs, Citigroup, etc., uh, are in a similar position. And remember, these are the biggest banks. So take a look at some of the mid-size and smaller banks, but also more vulnerably the European banks, okay? So they lower profitability, lower capital ratios, so they could be at severe distress if this energy situation and the coronavirus situation continues. Any questions, please let me know in the chat, in the group. But watch the video from yesterday, and I hope you have a good day.
