We Have More Oil Than We Know What to Do With

Chesapeake Energy files for bankruptcy... Will hundreds more follow?... Bill McGilton and Mike DiBiase called it... We have more oil than we know what to do with... The CARES Act explained... 'The Socialism Survival Guide'...

Our editors have warned for years about the precarious position of overleveraged energy companies...

Most recently, Stansberry's Credit Opportunities editors Mike DiBiase and Bill discussed the topic in their May issue... noting that bankruptcies and defaults today have been happening at a pace not seen since the 2008 to 2009 financial crisis.

One company they singled out was Chesapeake Energy (CHK). Once a pioneer in hydraulic fracturing ("fracking"), this oil and gas company was on its last legs because of a massive debt load... And after the COVID-19 pandemic sparked a historic drop in demand, it had little hope of paying it back.

Even before the pandemic struck, Bill – who is also the editor of our Stansberry's Big Trade service – sounded the alarm in the February 14 Digest on Chesapeake and other debt-ridden oil companies...

Back then, Bill warned that oil markets were concerned about global oversupply more than anything. He wrote about how prices would likely be capped in the years ahead. As Bill put it...

We're a long way from the 'Peak Oil' days of 2008...

To Bill, the tell was how the price of oil reacted with a shrug to seemingly significant geopolitical risks... like the now largely forgotten crisis surrounding the killing of Iran's top military leader – Maj. Gen. Qassem Soleimani – that kicked off the 2020 trading year.

Prices only rose 4% during that conflict... then dropped 16% soon after it. If something like that – direct conflict between the U.S. and Iran in the Middle East (and months before that, Iran's attack on Saudi Arabian oil facilities) – couldn't keep oil prices high for a long period of time, what would?

And as nations around the world continued to produce more oil, Bill noted that the supply-and-demand relationship meant the stage was set for lower prices in 2020...

The Organization of the Petroleum Exporting Countries ("OPEC") oil cartel planned to cut its oil production by 6% over the next five years. But global oil production outside of OPEC (including the U.S.) was projected to increase 12% over the same time. As Bill wrote then...

Because of the increased production (coupled with stable demand), the U.S. Energy Information Administration ("EIA") expects an oil surplus in 2020. EIA forecasts global oil supply to increase by 1.6 million barrels per day and global demand to increase by just 1.3 million barrels per day.

That's a surplus of 300,000 barrels per day.

Fatih Birol, the executive director of the Paris-based International Energy Agency, expects even bigger oil surpluses... At the Reuters Global Markets Forum in Davos, Switzerland, on January 23, Birol said he believes we'll see a surplus of 1 million barrels of oil per day, at least through the first half of 2020.

This was already bad news for oil companies with huge debt on their books...

The debt these companies were taking on to complete various drilling projects with high breakeven costs doesn't mix well when the resource they're pulling from the ground gets considerably less valuable due to higher supply and lower demand. As Bill continued...

Leveraged companies with huge debt on their books to fund more expensive oil projects with high breakeven costs (like offshore and deepwater drilling) are in real trouble.

Companies like Chesapeake Energy (CHK) and Antero Resources (AR) are struggling to hang on... hoping for higher oil prices.

Many of these companies not only can't make a profit... They can't even service their debts. Many are running out of money and can't borrow more. And one by one, they're going bankrupt.

And again, this was before the COVID-19 pandemic brought the world's "real" economy – like oil, production, travel, and trade – to a halt... and cut global oil demand by a third. And it was before the Saudis and Russia got into a shoving match over OPEC oil-cut agreements... and started producing more oil.

That kerfuffle helped tank the price of oil futures below $0 for a day in the U.S. back in April, as oil-storage facilities on land, pipelines, and tankers out at sea were literally filled to the brim.

For the second quarter of 2020, the EIA projected demand for oil around the world to average 83.8 million barrels per day (bpd), down 16.6 million bpd from the same time last year. And the agency said global supply of oil would average 92.6 million bpd, down about 8 million bpd year-over-year.

That's an excess supply of nearly 10 million bpd, or roughly 200 million gallons of gasoline per day, which forces more cuts to keep prices up to keep businesses running. As Bill said back in February, when he warned about what COVID-19 was already doing to oil prices...

If the world economy starts to slow...

The demand for oil will fall even more – creating an even greater disparity between supply and demand. In turn, we'll see even lower prices.

Already, China National Petroleum projects that demand-led growth for oil in China will fall from 5.2% in 2019 to 2.4% in 2020. And those projections were made before the coronavirus outbreak... which recently sent oil prices to 13-month lows on fears of declining demand.

Like a lot of other things in the pandemic era, the effects of the oversupply of oil were accelerated over the past few months. This is all to say, Mike and Bill were spot-on...

On Monday, Chesapeake Energy filed for bankruptcy protection...

As Stansberry NewsWire analyst Nick Koziol reported, Chesapeake – which has nearly $9 billion in debt on its books – filed for Chapter 11 protection and reached an agreement with its creditors to eliminate $7 billion in debt.

The news came about a month after the company – which previously got caught up in scandal under its former CEO – warned this was a likely course of action.

Chesapeake wasn't the first oil company to file for bankruptcy... and it likely won't be the last. In the past five years, more than 200 oil and gas producers have filed for bankruptcy protection... a trend that will likely continue. As Nick wrote...

CHK is the latest U.S. energy company to file for bankruptcy in the face of low oil prices caused by the coronavirus. Whiting Petroleum (WLL) and Diamond Offshore (DO) are other notable bankruptcies in the sector...

Energy research firm Rystad Energy recently said that more than 240 energy companies will have to file for bankruptcy by 2021 if oil prices remain around current levels.

This is a trend to keep an eye on. CHK's bankruptcy, while not surprising because of the company's warning, comes despite a huge rebound in oil prices. It won't be the last company in the sector to file for bankruptcy protections.

Indeed, since the negative-$37-per-barrel aberration in West Texas Intermediate ("WTI") crude-oil futures on April 20, we've seen prices rally higher back to about $40 per barrel. But that's still about 33% less than where oil prices were at the start of the year... and it's a long, long way from the record high of more than $140 per barrel back in 2008.

In the bigger picture, a major shift is happening in the oil industry today...

Oil companies are dealing with the realities of $40 oil.

There's a lot of debate in the industry about the direction of prices and how these companies can actually make money in the future...

Today, oil prices are closer to what they were in the 1980s and 1990s than much of the past two decades... And a lot of these overleveraged companies are still banking on higher prices to stay in business. As Alan Gula wrote in the May issue of our flagship Stansberry's Investment Advisory...

The Federal Reserve Bank of Kansas City took a poll of energy companies in April. The survey showed that the companies expect roughly 40% of their peers to go bankrupt if oil stabilizes around $30.

And in the meantime, they have to make tough decisions just to stay afloat. Chesapeake will do that, by the way, staying open while it goes through the bankruptcy process. But it's not the only company that's scrambling...

Take BP (BP), for example...

A few days ago, the oil major said it will sell its "petrochemical" business for $5 billion to London-based producer Ineos.

With oil demand having cratered and its business hit hard (with a 66% drop in earnings for the first quarter of 2020), BP said it wanted to sell $15 billion of assets by mid-2021.

This deal helps the company get there...

But this was interesting because petrochemicals could be considered the oil industry's one bright spot during the pandemic. It's the one area of the industry that has actually seen a slight uptick in demand, according to recent data from the EIA.

These chemicals – like ethylene, benzene, and methanol – are made from refined oil. They can be found in everything from tires and pharmaceuticals to fertilizer and laundry detergent.

But their main application is in plastic, like bags and masks. Plus, demand for plastic has been growing for decades. So what gives?

It looks like BP sold off what could have been one of its more promising business lines to meet short-term bottom-line needs, and that it's not betting on a rise in oil prices anytime soon...

Bernard Looney, the company's CEO, told the Financial Times in May that we may have already seen "peak oil" in the U.S. – and that the effects of the pandemic will last long into the future...

Could it be peak oil? Possibly. Possibly. I would not write that off.

Once again, be wary of overleveraged oil companies. The weakest of these companies have a great chance of going bankrupt. Mike and Bill are keeping tabs on these companies, alerting their subscribers how to protect their portfolios from them... and even showing how to make money by betting against them.

Think of the approach as "insurance" for your portfolio... That's how Bill describes his Big Trade service. Back in April, Bill closed out a 230% winning bet against offshore driller Transocean (RIG).

Transocean, which specializes in ultra-deepwater projects with high extraction costs, hasn't filed for bankruptcy protection yet. It had just enough cash and credit on hand to make it through the shock in March and April... But Bill believes the company could join Chesapeake in the Chapter 11 filing line soon enough.

Moving on, we want to alert you about a new resource from our colleague Dr. David 'Doc' Eifrig...

It explains everything you need to know about the CARES Act.

In March, President Donald Trump signed a historic $2 trillion stimulus bill to try to contain the economic devastation caused by COVID-19.

A lot of that money hasn't made its way through the economy yet... Plus, there are already talks of a second round of stimulus, dubbed the HEROES Act. So it's clear that the federal government is willing to spend whatever it takes to keep the country from falling into a depression.

And since 2020 is an election year, Trump is even more motivated to get the economy back on track.

What's less clear is exactly what the CARES Act – and any other relief efforts – means for you...

The bill promised a lot of things, including $377 billion for small businesses, $500 billion for big businesses, and $560 billion for individuals.

That's why Doc and his research team just released a new report to help his Retirement Millionaire subscribers understand what's really happening with government relief bills... how to take advantage of what's being offered... and how best to navigate the coming months.

Doc dives deep into the details of everything from what's available in COVID-19 health care coverage... to unemployment benefits... to your retirement accounts... to student loan debt... to what to do with any stimulus check you may have received.

We haven't seen the massive stimulus bill explained better anywhere else. As Doc writes in the new report, "That's because we want to help individuals like you." More from Doc...

Things are tough right now and lots of folks are doing their best to make it through this crisis. In the midst of all the uncertainty, we do know one thing: We can continue to empower you to take care of yourself. Because you're the best person to look out for you.

To get your copy of this brand-new report and to try out Doc's Retirement Millionaire service, click here right now. Doc's advisories consistently rank at the top of our annual Report Card year after year, and we believe you'll see why by reading this report.

Now, for more on what's coming in November...

While we're at it, there's another new resource that Digest readers might be interested in. It's from American Consequences executive editor and political commentator Buck Sexton.

We last wrote about Buck, a former CIA officer and longtime friend of Stansberry Research, back in the May 29 Digest... the day an interview with President Trump on Buck's syndicated radio show.

Trump told Buck then that a second shutdown wouldn't occur "no matter what"... among other things... in a roughly 20-minute conversation. And more recently, in today's edition of American Consequences, Buck gave a great handicap of the 2020 presidential election. He said, in part...

Fair or not, the American people expect the party in power to deliver.

Trump is the guy in the White House with the biggest job in the world, and voters in the swing states aren't going to respond well to anything that sounds like, "It wasn't my fault, it was the virus and the dirty-fighting Democrats" – no matter how true that may be.

Buck also recently put together a new book that our founder Porter Stansberry says "should be required reading for every American who thinks they know a lick about politics, financial markets, and the state of our country today."

It's called The Socialism Survival Guide...

In this book, Buck explains what he believes will happen after the 2020 presidential election in November, covering topics from health care and government bureaucracy to our out-of-control national debt.

He also makes eight radical predictions and explains how everyday investors can prepare for their inevitability heading into 2021 and beyond. And this is coming from a guy who actually visited Trump in the Oval Office a few months ago, talking about a variety of topics. As Porter said...

This book is exceptional. Buck takes no prisoners. Nor should he.

If you want to know the threats and challenges the U.S. political and economic system faces in the years ahead, you'll want to check out Buck's book. And if you're interested in grabbing a copy, you can learn more about how you can do that right here.

China Nets Billions in 'Hot' Money

Our colleague Brian Tycangco – the Asia-based analyst on Dr. Steve Sjuggerud's research team – discusses the factors behind a big appetite right now for Chinese bonds and what that means amid tensions with the U.S.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.

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In today's mailbag, more discussion on the efforts to develop a COVID-19 vaccine... and a reply to our question yesterday about investing lessons you may have learned as a kid. Do you have a question or a comment? Drop us a line at feedback@stansberryresearch.com.

"There seems to be a lot of discussion about how we should develop 'herd immunity.' Really? How is that done?

"Well, you either have, 1. a large portion of the population exposed and develop antibodies or, 2. you have an effective vaccine.

"The first approach would require another 250,000,000 people to be exposed. What would that look like in terms of hospitalizations? and deaths? and cost?

"Not pretty and how long will it take?

"The second approach certainly takes a long time.

"1. Develop vaccines.

2. Test vaccines
3. Manufacture 1 billion doses or more.
4. Distribute doses everywhere
5. Overcome objections to receiving vaccine. What would be the percentage of non-takers that would make the whole effort ineffective and thereby not achieve herd immunity?

"And then after all that, start again since it will have mutated. I just do not see any good answers." – Paid-up subscriber Howard S.

"Many thanks to readers Michael P.'s and Steven I.'s letters today (6/30) – and Stansberry for printing them – for giving me a breath of real, fresh air regarding all the vaccine blather I read/hear every day across many 'news' sources.

"Now I will play a drumroll in my head anticipating the shrill attacks on them." – Paid-up subscriber Gary S.

"The only thing my [parents gave] is the way of business and family business. Now I'm investing on my own and learn so much from you guys." – Paid-up subscriber Fredrik H.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 1, 2020