The S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) is poised to open higher on the back of a positive overnight lead from Wall Street and Australia's new $130 billion job-keeper stimulus.
But there's one sector that's likely to be wallowing in red ink today. This is the energy sector as the oil price collapsed further last night as the world is running out of places to store the commodity.
The Brent oil price slumped 8.8% to US$22.71 a barrel while the West Texas Intermediate (WTI) tumbled under US$20 per barrel before clawing back some lost ground to finish 6.6% weaker at US$20.09 a barrel.
Sector needing a capital injection
Crude prices are likely to fall under US$20 if you ask me and that will have a big impact on ASX energy stocks. The Woodside Petroleum Limited (ASX: WPL) share price, Oil Search Limited (ASX: OSH) share price and Santos Ltd (ASX: STO) share price are likely to re-test multi-year lows.
Some of our energy stocks will likely need an emergency cap raise if the oil bear market lasts much longer, and from the looks of it, the oil market crash is likely to outlive the COVID-19 bear market.
Even news that US President Donald Trump spoke with his Russian counterpart Vladimir Putin yesterday on calling a price war truce did little to turn the tide. Russia and Saudi Arabia are flooding the market with crude to gain an upper hand.
Drowning in oil
The surge in supply is overwhelming global oil infrastructure, according to Bloomberg. This is fuelling speculation that oil storages are being topped up to the brim!
That is very bad news for the industry. As highlighted in my previous article, the price of some crude products could fall below zero as oil producers can't give it away fast enough!
This could lead to a bizarre situation where it is cheaper for an oil producer to pay customers to take the oil than for the producer to store it.
Oil under US$3 a barrel
While there's still a US$20 plus buffer for Brent and WTI, the price for a barrel of crude in some smaller markets have plunged even more. Bloomberg reports that oil from Canada touched a record low of US$3.82 while some are trading under US$3.
Most of the larger ASX energy stocks are one step removed. They produce liquefied natural gas (LNG) instead of crude and have contracts in place with Asian customers.
However, they will be affected by the crude market meltdown as LNG prices lag the oil price by about six months.
Foolish takeaway
The flood of crude supply comes at a time when demand is falling off a cliff due to the coronavirus. Economic activity around the world have come to s screeching halt as governments restrict the movement of their citizens to stem the pandemic.
Falling oil prices would normally be great news for airlines like Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) if not for the fact that there is no demand for air travel.
The silver lining is that when quarantine restrictions end and nations restart their engines, the low oil price will act like an extra stimulus.
