Although oil prices rose more than 5 percent on Friday after President Trump said the Department of Energy would buy crude to pump into the nation’s oil reserves, on the week, oil prices tanked some 24 percent, its deepest price plunge since the 2008 financial crisis.
Yesterday, as the equity market tanked across the globe, WTI fell 9.5 percent to settle at $28.70 per barrel while Brent crude tanked 11.2 percent, settling at $30.05 per barrel, near its lowest level since January 2016.
Even at these low prices, hundreds of small U.S. oil producers, particularly shale-oil companies whose wells are expensive to drill, face a no-win decision: they can shut in their wells, make no income, and wait for higher prices; or keep oil flowing and cash coming in, but lose money on every barrel sold. As we have detailed in the Trends Journal, many borrowed heavily to drill the bounteous wells; now those loans are coming due.
About $110 billion worth of the $936 billion in bonded debt owed by U.S. oil and gas producers are trading at yields 10 points or more above those of U.S. Treasury notes. That classifies the bonds as “distressed” – at risk of near-term default.
About $175 billion of the total bond value is rated less than BBB, falling into the category of junk bonds. About two-thirds of these energy-based junk bonds are considered distressed.
With oil futures contracts trading in the $30-per-barrel range, far below the average $55-a-barrel breakeven point for many U.S. shale wells, it is estimated that some 50 percent of publicly-traded shale oil and gas producers will go bankrupt over the next two years as their debt payments become due.
Still, U.S. shale production hit a record high of 13.1 million barrels per day last month and will edge higher as wells now being drilled are completed and producers keep the taps open to maintain cash flow, however small.
Prices plummeted after Russia failed to agree to Saudi Arabia’s demand for production cuts to lift prices. The Saudis are expected to boost production and flood the market, driving prices down to force compliance with their wishes for cuts, as they did in 2014.
American producers are in much weaker financial condition today, and many won’t be able to endure the effects of the Saudis’ move.
TRENDPOST: The four largest U.S. banks hold $65.5 billion in loans to oil and gas companies, a sector of the economy falling faster than virtually any other. If current oil prices last for more than two weeks, the banks will see a “notable uptick” in losses from these loans, according to analysts at KBW.
Such loans make up 10 percent or more of portfolios at many U.S. regional banks. Cadence Bancorp, Cullen/Frost Bankers, Texas Capital Bancshares, and BOK Financial, all based in Texas or Oklahoma, have seen their share prices plunge at least 20 percent along with oil prices.
Oil Stains
Russia has signaled it has no interest in rejoining the Saudis. Instead, it’s betting that cheap oil will boost demand and soak up excess crude now awash in the market.
While Russia has said it can tolerate today’s low oil prices for as long as ten years, they said they must have Brent selling at $42 per barrel to make that call.
Igor Sechin, head of the Rosneft state-owned oil company, has said the previous cuts Russia and Saudi Arabia agreed to are rendered “meaningless” by increased output from U.S. oil producers.
Analysts see Russia’s decision as aimed, in part, at the U.S. oil industry. Low prices for a long time could drive a significant amount of American shale oil out of business.
“Now we have a chance not just to produce and sell as much as we need to but to throw American shale overboard,” said Dmitry Kiselev, director of Russia’s state news agency.
He contended that Russia could withstand low prices longer than Saudi Arabia and noted that Russia has greater foreign currency reserves at $570 billion than Saudi Arabia does with $502 billion.
An OPEC delegate, wishing anonymity, said that Saudi’s crown prince thought Russia was bluffing when it balked at cutting production and ultimately would go along.
“That was his gamble and he did not win,” the delegate said.
Rosneft stock dropped 22 percent on the London exchange last week. Russia’s state-run Gazprom gas company’s shares fell 18 percent.
TREND FOREAST: While the softening oil prices will sink many oil producers, it will also hit real estate prices hard in oil rich/shale rich boom towns that sprung up when U.S. oil production started to rise in 2008, and, over the next seven years, marked the fastest oil production increase in U.S. history.
TREND FOREAST: Essentially, there is more oil supply than demand. As we have noted for several weeks, oil prices began to fall before the coronavirus panic made the news, since there was a global slowdown before the virus hit. Thus, with demand falling as global growth dramatically slows, there will be growing civil unrest in oil-rich nations as their economies rapidly decelerate and basic living standards deteriorate.
Bankster Oil Blues
The four largest U.S. banks hold $65.5 billion in loans to oil and gas companies, a sector of the economy falling faster than virtually any other. If current oil prices last for more than two weeks, the banks will see a “notable uptick” in losses from these loans, according to analysts at KBW.
Such loans make up 10 percent or more of portfolios at many U.S. regional banks. Cadence Bancorp, Cullen/Frost Bankers, Texas Capital Bancshares, and BOK Financial, all based in Texas or Oklahoma, have seen their share prices plunge at least 20 percent along with oil prices .
