U.S. oil prices have been on a roller coaster ride over the last few weeks, at one point dropping below $0 for the first time in history to -$37.63 a barrel. Oil has since rebounded from its subzero levels, but it remains questionable as to whether it can stay there. It begs the question, what does this mean for investors and the U.S. oil market generally?
When prices cratered below zero, there were those that weighed in that it was nothing to worry about. After all, the subzero price drop really had more to do with the expiration of contracts for oil futures. It was explained that the current demand for oil is so low that producers would rather put their oil in storage and then sell it at some point in the future. Placing additional strain on the market, the U.S. is running out of places to store it, with backlogs of oil tankers from Saudi Arabia out at sea and being turned away from U.S. shipping ports.
The U.S. has traditionally been a net importer of oil, but with the emergence of oil fracking, the U.S. at one point in 2019 surpassed Saudi Arabia as the world’s top oil exporter. This trend towards parity gave many observers of the U.S. oil market a feeling of confidence that the U.S. was a rising oil power, with President Trump going so far as describing the U.S. level of participation as “energy dominance.” But as pointed out by professionals, increased participation in the market has little to do with control over the market. For instance, the price of U.S. oil recently began to spiral down when Russia and Saudi Arabia started to increase their production levels. U.S. oil prices teetered even further, and then below zero, when the global and U.S. economic response to the spread of Covid-19 began to take shape – every state being under some level of a stay-at-home order, with fewer cars on the road, fewer people travelling by air, and U.S. oil workers in Texas and elsewhere being laid off in the tens of thousands. The pumps have stopped and oil companies are already declaring bankruptcy, with likely more to follow.
U.S. oil companies have been operating at a loss year after year (i.e., billions of dollars in losses), embroiled in massive debt, and only propped up by the continual flow of investor dollars, a fact that any responsible broker should know and communicate to customers in recommending any oil-related investments. An opinion piece in the New York Times recently described investor optimism in the U.S. oil market as a product of “an illusion created by cheap debt,” and that even prior to the Coronavirus, America’s oil fracking business model was never financially viable and that its collapse was already underway. The present pandemic thus appears to be positioned in pushing America’s oil industry over the edge, along with the portfolios of nervous investors.
While this is all making headlines now, it only confirms our own experience over the years in fighting to recover investor losses in U.S. oil products. The U.S. fracking industry has never been profitable, and despite the industry’s volatility and known risks, investors – even those with conservative investment objectives – have been led to believe that these investments were safe and would become profitable at some point in the future. Retirees especially, who are out of the workforce and have no other source of income, often find it difficult to resist the high yield of return that some of these products have promised. And what many investors have never had explained to them is that many of these products are high-commission vehicles for the brokers and brokerage firms that underwrote these debt-financed companies through their investment banking operations – a conflict of interest that is rarely disclosed to the typical investor.
If your broker or financial advisor recommended any oil or energy products to you without properly reviewing the risks in the prospectus and without diversifying your investments in other areas, you may be able to recover your investment losses, just as other investors have through our representation, whether for our wins involving products like Master Limited Partnerships (MLPs) or fee-laden, and highly-complex, leveraged oil ETFs issued by ProShares, such as UCO or SCO. For over twenty years, Malecki Law has helped investors in New York and other states recover investment losses resulting from unsuitable and poor investment recommendations. Most of our clients choose a contingency fee, which means we do not get paid unless you do. Call us for a free consultation.