We saw a massive selloff in both the oil and stock markets.
The coronavirus was spreading enough fear on its own. Sunday night, things were escalated with a price war breaking out between the Russians and Saudi Arabia over oil. This is a situation that could have great impact globally.
It started by leaving carnage behind in the stock market. The DOW dropped by over 2,000 points on Monday.
This led Jim Cramer to take to the air to express his confidence, or lack thereof, with the oil industry. A sustained periods of low oil prices is going to hurt a lot of oil companies.
Here is what Cramer said:
Of the more than 35 companies in the oil industry he follows, Cramer said, “I think fully maybe 9 or 10 can go.”
The standoff between Russia and Saudi Arabia will have enormous impact on the United State oil industry. Many of the companies are carrying high debt loads which become harder to service as the price of oil drops. The Russians and the Saudis are both selling oil at a loss with the levels we are at now. They can, however, withstand the battle longer than many of the U.S. companies who have debt coming due this year.
Low oil prices are a mixed blessing for the economy. Naturally, any company that uses a lot of petroleum will benefit from lower prices at the pump. The negative is that the oil industry employs a lot of people, many with high paying jobs. Prolonged prices at these levels could mean massive layoffs. At the same time, transports such as the railroads could see a reduction in what they move since oil transport makes up a significant part of their business.
Regardless of how this all unfolds, the oil industry will rebound at some point. There will be bankruptcies which clear out some of the weaker hands. Over time, the industry will consolidate and start its path of growth.
Even with the drastic increase in renewable energy, the simple fact is the global energy needs are increasing at a pace greater than it can provide.
The challenge is that this could be a 2 year process with a lot of pain felt in the process.
This is not financial advice.
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