Oil and gas investments have experienced extreme volatility throughout 2020, as the underlying price of oil has plummeted. Oil prices briefly dropped below $0 for the first time in history, with contracts for West Texas Intermediate (WTI)—a grade of crude oil used as North America’s main benchmark for oil pricing—trading at approximately -$37.00 a barrel on April 20, 2020.
Oil companies in the United States have been saddled with debt and operating at a loss year after year, well before the COVID-19 pandemic caused further declines in oil prices. Many of these companies have been kept solvent only by the continual flow of investor dollars, as investors or financial advisors speculate that the price of oil will eventually rise and the investments will be profitable in the future. Investments in oil and natural gas companies, such as Chesapeake Energy, Diamondback Energy, and Whiting Petroleum Corp., have all declined precipitously this year as oil prices plunged. Complex exchange traded funds (ETFs), such as ProShares Ultra Bloomberg Crude Oil (UCO), United Stated Oil Fund LP (USO) and United States 12 Month Oil Fund LP (USL), collectively holding billions of dollars of investor assets, have also dropped over 70% in the last three months.
Given the high levels of debt and volatility in the industry, investments in the United States oil and gas industry are very risky and not suitable for all investors. Financial advisors or brokers who recommend and purchase oil and gas investments to investors have a duty to disclose all the risks associated with these types of investments, including that they are speculative bets in debt-laden and often unprofitable companies and can be high commission investment vehicles. If the financial advisors or brokers failed to do so, they and their advisory or brokerage firms could be liable for the losses incurred from recommending these investments.