Lower Oil Prices

To the dismay of U.S. shale producers, oil prices continue their long slow slide into the abyss.  Perhaps the current price of $35 per barrel – an 11 year low – is the final destination.  More than likely, however, it’s a brief reprieve before the next descent.

 

excess natural gas burns southeast of BaghdadPhoto credit: Mohammed Ameen / Reuters

 

Oil exporters, including Saudi Arabia and Russia, have maintained high production rates.  Their goal is to bankrupt U.S. shale companies and preserve market share.  At the same time, oil demand is tapering as the global economy cools.

 

1-World3Global crude oil and condensate (c+c) production as of June 2015. In record high territory.

 

The combination of high production and declining demand has resulted in excess supply, and lower prices.  The trend of lower prices won’t change until either demand increases or production decreases.  At the moment, it doesn’t appear that either of these factors will change any time soon.

So how low can oil prices go?  If you recall, in the late-1990s, oil prices dropped below $20 per barrel.  Goldman Sachs thinks we’ll see $20 per barrel oil again.

Obviously, oil prices can’t go to zero.  However, this offers little consolation for the many oil companies that borrowed gobs of money from Wall Street to leverage development of fracked wells that require $60 per barrel oil to pencil out.

 

2-Russia3Contrary to widespread expectations, Russian production has proved more than resilient in the face of low prices. The decline in the ruble and high export taxes on oil (which are based on threshold prices) have left Russian producers in a competitive situation.

 

Declining Hedges

So while it isn’t possible for oil prices to go to zero.  It is possible for the stock prices of oil companies to go to zero.  In fact, over the next 12 months there could be a rash of bankruptcy’s that results in delisted, worthless shares.

Here’s why, as reported by Reuters

 

“A Reuters analysis of hedging disclosures from the 30 largest oil producers showed the sector as a whole reduced its hedge books in the three months to September. When oil started falling from around $100 a barrel in mid-2014 due to a global supply glut, many U.S. producers had strong hedge books guaranteeing prices around $90 a barrel.

Now, with prices below $36 and flirting with 11-year lows on renewed oversupply fears, only five drillers among those reviewed by Reuters expanded their hedges in the third quarter and eight had no protection beyond 2015, leaving them fully exposed to price swings.

The five companies that increased outstanding oil options, swaps or other derivative hedging positions to secure a price floor for their production, added 13 million barrels in the third quarter to 327 million barrels covered, data show. Five other firms did not expand their books, with positions that either expire in 2016 or no hedges altogether. The remaining 20 companies had hedges decline by 72 million barrels from the previous quarter.”

 

3-WTIC weeklyIt may be sensible to take hedges off here – we will only know for certain with hindsight (note that fundamental data will not inform us in real time about the timing and the height of the price low – the low will be made at a time when the fundamentals look their absolute worst, so now could actually be a good time). It certainly didn’t make sense a year or 18 months ago though – and some producers suffered from doing it way too early – click to enlarge.

 

Doom and Gloom for North American Oil Producers

Suspended animation, in the form of price hedges, allowed many U.S. oil companies to maintain production in 2015.  Yet now that those hedges are expiring, and sales will be settled at daily market prices, these companies will get squeezed.  In fact, it may get worse before it gets better.

Turning off oil production is not as simple is flipping off a light switch.  Unfortunately, a twisted scenario can come about where output increases but revenues fall.  In other words, companies can find themselves producing and selling more oil while earning less.

That’s what happened to Continental Resources.  They foolishly sold their hedges in late 2014 and operated in 2015 without hedges.  Given oil’s rapid price decline, it has been a brutal year.

During the third quarter 2015, Continental Resources increased output by 25 percent from the year before.  However, crude and natural gas revenues fell 46 percent over this same period.  What’s more, had Continental Resources merely held on to the hedges they sold in late 2014, they would have made $1 billion more in 2015 than they did.

 

4-CLRThe market evidently didn’t like CLR’s recent earnings announcements – click to enlarge.

 

As of mid-December, there have been 39 North American oil producers that have filed for bankruptcy protection.  The latest being Texas driller, Magnum Hunter Resources Corporation.  At the time of their bankruptcy filing, they had $6.4 million in cash and $1.1 billion in total liabilities.  That represents a debt to cash ratio of 17,187 percent.

Unless they can figure out how to turn a profit on $35 per barrel oil, restructuring is futile.  Indeed, it’s doom and gloom for North American oil producers.

 

5-GS breakeven shaleVarious break-even curves for different types of oil production, base case estimates by Goldman Sachs from around mid year. According to this, the vast bulk of shale oil production is uneconomic below $60/ bbl. – click to enlarge.

 

Charts by peakoilbarrel.com (based on EIA data), stockcharts, Goldman Sachs.

 

Image captions by PT

 

M N. Gordon is the editor and publisher of the Economic Prism.

 

 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

4 Responses to “Doom and Gloom for North American Oil Producers”

  • M.N. Gordon:

    Indeed. Point taken. Similarly, what I was attempting to communicate, though perhaps unsuccessfully, is that the old hedges have expired yet the price of oil hasn’t bounced back above production costs.

  • wrldtrst:

    Gordon,
    If you still have hedges on down here, you don’t understand hedging. Optionality of in the money vs out of the money calls… Cost of production is your strike.

  • Hans:

    We had a list of over twenty some shale producers, which itself
    has collapsed to eight.

    The first of the collapse, were the $90+ producers (June 2014 to June 2015)..In the next TTMs,
    will be the $70+ oilers whom will either go bankrupt or be acquired.

    Production costs has also declined, as these projection had often exceeded $90.oo p/b several
    years ago.

    Mr Hamm and another oil CEO from the Russia, both are projecting goo in the 50’s
    by the summer next year. I am not that optimistic.

    I view CLR as currently overpriced and having a debt to equity ratio (108%) which needs
    to be watched. The companies removed from our watch list had to much debt. Investors
    need to examine all balance statements, including those requiring future cash obligations.

  • Hans:

    The chart by GS is non-nonsensical as more production the greater the cost,
    Mr Gordon.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • safe spaceReality is a Formidable Enemy
      Political Correctness Comedy We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio's recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.   How to most effectively create a “safe space” on campus Cartoon by Nate Beeler   It is especially funny (or...
  • Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. Gold imports by India, the world's biggest buyer of bullion, could rise on pent-up demand from jewellers after the federal government decided to scrap an excise duty on jewellery it imposed in March, the head of a trade body said on Monday. REUTERS/Ajay Verma (INDIA - Tags: BUSINESS COMMODITIES)Fresh Mainstream Nonsense on Gold Demand
      They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.   Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters   This was brought home to...
  • fir wateringDrowning the Fir
      Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you:   Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
  • swiss-cultureSwitzerland About to Vote on “Free Lunch” for Everyone
      Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate.   The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
  • Hollande 2The Wonder Years Are Over
      Everybody Is Unhappy PARIS – “France?” We were in a cab on the way from Charles de Gaulle Airport yesterday. We had innocently asked our cab driver how things were going in the country. He had some thoughts...   French president Francois Hollande: against all odds, he managed to attain the most powerful position in French society. And yet, even he is unhappy. Photo credit: Patrick Kovarik / AFP   “France is a mess. We have 5 million people unemployed. And...
  • mossack fonsecaGold – The Commitments of Traders
      Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way.     As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
  • picture-social-contract-not-foundHeretical Thoughts and Doing the Unthinkable
      Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.   Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC   Speaking at an investment conference in New York last week, George Soros’ former partner...
  • ClintotrumpStaying Home on Election Day
      Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates.   US election circus: Deep State Rep vs. Rage Channeller   The first, a loose...
  • Jackboot 2How the Deep State’s Cronies Steal From You
      Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn.   Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland   It is an excellent place for seafood and soda bread on a...
  • time100-grid-covers-whiteThe World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
      Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become.   Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
  • YenThe Japanese Popsicle Affair
      Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens.   Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...
  • Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, December 18, 2015.  REUTERS/Toru HanaiKuroda-San in the Mouth of Madness
      Deluded Central Planners Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.   BoJ governor Haruhiko Kuroda Photo credit:...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com