Shale oil producers in the United States are mounting pressure on the US authorities as they are crunched by 17-year record low crude prices. Occidental Petroleum shares plummeted by 65%, Continental Resources - by 60%, EOG Resources lost almost a halt of their market capitalisation since the beginning of March alone.
It seems rather surprising that the US Energy Information Administration forecasted an increase in domestic shale oil production by 18,000 bpd or 0.2% on top of the current production level. Shale producers attract credit lines to be able to develop production. "Banks wrote off as much as $1 billion in 2019 in reserve-based shale loans, more than they have in 30 years of making them," Mike Lister, an energy banker at JPMorgan Chase & Co told Bloomberg. That trend could last the rest of 2020, he said. Banks may cut their lending to cash-starved energy companies in the US by 10% to 20% this spring.
Banks with heavy exposure to the energy industry may be facing defaults too. Analysts at Keefe, Bruyette & Woods published a list of 16 US banks with the largest amount of credit exposure to tangible common equity (TCE). Although there are no large banking institutions on this list, the majority of the US banking sector, like JP Morgan Chase, Bank of America, Citigroup and Wells Fargo, had loan exposure from seven % to 15% of TCE as of December 31, 2019. So, a significant damage to the US financial sector may be remarkable.
Intensive borrowing allowed shale producer to rapidly increase oil output and exports. When the OPEC+ agreement was in place, production was continuously increased to nine million bpd as prices enabled shale producers to have constant increase in production. The overall oil output in the US rose above 13 million bpd. But such a pace may only be justified when crude prices are above production costs. Shale-production costs in the US market vary, but they are certainly well above existing prices. Dimitry Dayen, senior research analyst for energy at ClearBridge Investments, in an interview to MarketWatch said "the best players in the Permian Basin [in the Southwest] need crude north of $50 a barrel in order to be cash flow positive, while Russia needs a price of about $42 to balance its budget and Saudi Arabia needs a whopping $75 a barrel". Moreover, crude prices below $30-31 will not allow shale producers to cover their direct costs. Such harsh conditions will force them to shut down oil wells and leave the market or they will be taken over by other oil giants. So far oil deliveries of shale producers are hedged from the price volatility for at least a few weeks. The US Administration's plans to fill crude reserves to the top could support the industry by buying as much as 77 million barrels of crude to go into the country's strategic reserves. This will fill US storage facilities by three quarters. According to Mizuho Bank the US storage facilities could hold no more than 135 million barrels as of now, given the fact that they are half full. The overall daily volume of crude that could be pumped in reserves is not to exceed two million barrels.
This might be the last call for US shale producers to increase their production. If low crude prices survive for a few months, the shale industry in the US could slip into agony, several companies may go bankrupt, and the unemployment in the sector may soar dramatically. However, this is not a major threat to the US economy. The country is not oil-dependent, most of the oil produced domestically is consumed within the country and imports could be rapidly increased if needed. The world oil market will not be affected too much as there are too many crude exporters queuing to raise their production, including OPEC and non-OPEC countries.
The alternatives can be seen in the pressure the White House is putting on Saudi Arabia to cease the price war and the plans that Saudi Arabia has to boost production by April. Such pressure could be fruitful given the close relationship between the two. Saudis themselves could hardly sustain low prices for a long time. Moreover, the possible increase in the demand for oil in China may push crude prices to the $30-$40 area in the coming months. This might give a fragile hope for a salvation of the shale industry in the United States.
Nevertheless, at the moment oil consumers in China, India and Europe could take advantage of the low crude prices to reduce their costs.
Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.
Indiscriminate reliance on illustrative or informational materials may lead to losses.
Risk Warning: Trading Forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Prior to trading, you should take into consideration your level of experience and financial situation. TeleTrade strives to provide you with all the necessary information and protective measures, but, if the risks seem still unclear to you, please seek independent advice.
© 2011-2020 TeleTrade-DJ International Consulting Ltd
TeleTrade-DJ International Consulting Ltd is registered as a Cyprus Investment Firm (CIF) under registration number HE272810 and is licensed by the Cyprus Securities and Exchange Commission (CySEC) under license number 158/11.
The company operates in accordance with Markets in Financial Instruments Directive (MiFID).
The content on this website is for information purposes only. All the services and information provided have been obtained from sources deemed to be reliable. TeleTrade-DJ International Consulting Ltd ("TeleTrade") and/or any third-party information providers provide the services and information without warranty of any kind. By using this information and services you agree that under no circumstances shall TeleTrade have any liability to any person or entity for any loss or damage in whole or part caused by reliance on such information and services.
TeleTrade cooperates exclusively with regulated financial institutions for the safekeeping of clients' funds. Please see the entire list of banks and payment service providers entrusted with the handling of clients' funds.
TeleTrade-DJ International Consulting Ltd currently provides its services on a cross-border basis, within EEA states (except Belgium) under the MiFID passporting regime, and in selected 3rd countries. TeleTrade does not provide its services to residents or nationals of the USA.