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:

  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

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