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!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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:

  • Gold Sector: Positioning and Sentiment
      A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
  • India: The next Pakistan?
      India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society.   The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo   Tribal cultures face...
  • The Long Run Economics of Debt Based Stimulus
      Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.   What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity.  Although the fat lady has so far only...
  • Welcome to Totalitarian America, President Trump!
      Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed.   Image adapted from the cover of “Deep State #5” - depicting an assassin from the future   President Trump joins the very crowded list of opponents of the American...
  • March to Default
      Style Over Substance “May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”   Well, Maxine Waters is obviously right – impeaching the president is an urgent...
  • Boosting Stock Market Returns With A Simple Trick
      Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends.   Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
  • Searching for Truth
      Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth?   Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
  • Why the 21st Century Sucks - Turtles All the Way Down
      A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
  • Gold and the Fed's Looming Rate Hike in March
      Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
  • The Unstable Empire – A Campfire Tale
      Campfire Tale   Caesar: The Ides of March are come. Soothsayer: Ay, Caesar, but not gone. — Julius Caesar, Shakespeare   GRANADA, NICARAGUA – Today, we stop the horses and circle the wagons. For 19 years, we have been rolling along, exploring, discovering. We began with the assumption that we didn’t “know” anything - so we kept our eyes open. Now we know even less.   Famous people who knew nothing and were not shy to admit it: Sergeant Schultz...
  • Off the Beaten Path in Mesoamerica
      Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse.  There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance.  The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings.   Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
  • Why Silver Went Down – Precious Metals Supply and Demand
      Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.   Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School'   The facile answer is...

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