Shares of many American oil producers are taking a hit today on the news that China will impose a new 5% tariff on crude oil imported from the United States, starting in September. The announcement is the latest escalation in the trade war between the two countries. China intends to place new or increased tariffs on about $75 billion in American goods including soybeans, animal proteins, vehicles, and crude oil.
The news is having the largest impact on shares of smaller, less financially stable oil producers. For example, Whiting Petroleum (NYSE: WLL) saw shares decline as much as 13.2%. The business reported a surprising loss in the second quarter and axed one-third of its employees in an effort to shore up its financial foundation.
Shares of Chesapeake Energy (NYSE: CHK) declined as much as 10.6% and shares of Oasis Petroleum (NYSE: OAS) dropped as much as 10.5%. As of 2:50 p.m. EDT, the energy stocks had mixed trajectories: Whiting Petroleum sat at daily lows while Chesapeake Energy and Oasis Petroleum each recovered some ground for the day's low points. The stocks have lost between 29% and 69% since the beginning of the year.
Image source: Getty Images.
Today's news isn't entirely surprising given the recent tit for tat between Washington and Beijing on trade issues. It's important to note that China's new 5% tariff on crude oil originating from the United States is unlikely to have a significant effect on American energy exports.
China imported an average of 221,000 barrels per day (bpd) of crude oil from the United States in 2017 and 228,000 bpd in 2018, according to data from the U.S. Energy Information Administration. Imports averaged just 111,000 bpd through the first five months of 2019.
Despite the fact that the world's largest oil consumer has turned a cold shoulder to American crude oil, the United States continues to sling record volumes of the energy source across the globe. Case in point: The United States exported 1.15 million bpd of crude oil in 2017 and averaged 2.8 million bpd in the first five months of 2019. Including all petroleum products, total energy exports from American borders averaged 8.25 million bpd in the first five months of this year.
Yet while the latest escalation of the trade war is unlikely to directly affect total American energy exports, it could still prove costly to oil producers. Investors are anxious about the potential for trade tensions to slow economic growth or even tip the global economy into recession, something that may already be underway. That could sap energy demand and further weaken prices.
As a precaution, the West Texas Intermediate (WTI) benchmark for crude oil slipped 3% today, compared to a 1.8% decline for Brent crude. WTI is now trading hands at less than $54 per barrel. Brent crude is at less than $59 per barrel.
Lower energy prices could jeopardize the fragile recoveries of higher-cost, less financially stable oil producers:
First Half 2019 Operating Income (Loss)
First Half 2018 Operating Income (Loss)
Data source: SEC filings.
The three companies in the table above paid a combined $520 million in interest expenses on debt in the first half of 2019 and are still attempting to ramp up cash flows. That debt burden could become a major obstacle in a world with slowed or negative growth and sharply lower crude oil prices.
Such a scenario could result in more surprise losses for Whiting Petroleum, which cited lower crude oil prices as the main reason for its weak Q2 performance. It could undermine the strategy of Chesapeake Energy, historically focused on natural gas, to invest heavily in oil production. It would also raise questions about Oasis Petroleum's intention to raise capital spending for the remainder of the year, considering that cash might be better used to protect against economic uncertainty.
Investors are increasingly worried that the escalating trade war between Washington and Beijing threatens to tip the global economy into a recession, which is more significant than potentially closing off the Chinese market. That could dampen energy demand and cause prices to tumble, which would hurt the least financially secure oil producers the most.
Given the woeful year-to-date performances of Whiting Petroleum, Chesapeake Energy, and Oasis Petroleum, today's slump in the prices of shares isn't too surprising. But the companies could continue to shed value if trade tensions and economic anxieties persist.
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