‘The other bomb that’s dropping’ — Cramer’s warning as first shale company files for chapter 11

Analysts have warned that falling oil prices will lead to a wave of consolidation or bankruptcies in the U.S. energy sector, and the Street got its first taste of what could be to come when U.S. shale producer Whiting Petroleum filed for bankruptcy on Wednesday.

“The oil patch is falling apart … This is the other bomb that’s dropping,” CNBC’s Jim Cramer said Wednesday on “Squawk on the Street.” “I think they’re the first of many,” he said in reference to Whiting’s bankruptcy filing.

Oil producers are struggling to breakeven as crude prices tumble. The coronavirus outbreak and subsequent travel slowdown has led to soft demand, just as a price war between OPEC+ nations Saudi Arabia and Russia broke out.

U.S. West Texas Intermediate crude currently trades around $20.36 per barrel, after losing more than half its value in the month of March. The contract is coming off its worst month and quarter on record. Depressed prices have hit the industry hard — the S&P 500 energy sector has dropped 53% this year.

Brad Holly, CEO of Whiting Petroleum.

Adam Jeffery | CNBC

Cramer noted that the industry remains key to the economy given the number of people it employs both directly and indirectly. “This is something that we have to keep an eye on, because when we start seeing the layoffs, some of the layoffs are going to bounce back, and some of them are not coming back at all,” he said. 

Cramer also noted that the U.S. “can’t afford oil to go down to $5, $10” since it would be “completely destructive for our companies.” He said that almost every company — apart from Chevron — is not ready for an environment where oil prices are that low. “You do not want a big raft of bankruptcies,” he warned.

On Wednesday oil moved lower as Saudi Arabia increased its oil production to more than 12 million barrels per day, according to a report from Reuters, flooding the market during a time of unprecedented demand loss.

The move comes after talks between OPEC and its allies broke down in early March. Saudi Arabia recommended extending production cuts in an effort to combat falling demand, but Russia rejected the proposition. This, in turn, kicked off a price war between the two powerhouse producers.

As oil prices have tumbled, the United States has sought to intervene. On Tuesday U.S. Energy Secretary Dan Brouillette spoke to Russian Minister of Energy Alexander Novak, during which the two discussed the oil market.

“Secretary Brouillette and Minister Novak discussed energy market developments and agreed to continue dialogue among major energy producers and consumers, including through the G20, to address this unprecedented period of disruption in the world economy,” a statement read.

The call followed a conversation on Monday between President Donald Trump and Russian President Vladimir Putin.

If prices continue to slide, some are warning that the U.S. could reverse course on its way to becoming an energy independent nation.

“You want energy self-sufficiency. You do not want to get us back to where the Russians and the Saudis want us, which is to be enslaved to them in terms of national security,” Cramer said. Losing energy self-sufficiency “could be a real casualty of this period that won’t come back, and I think something that was really great about America that’s happened in the last three years,” he added.

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