Oil recently suffered its most significant weekly loss since 1991, crashing 29% to below $20 per barrel. A toxic concoction of cratering global demand due to the Coronavirus pandemic and Saudi Arabia and Russia throwing tantrums like petulant children caused the plunge. With prices at unsustainable levels for most oil companies, does this mean an end for America’s shale revolution? The latest data fail to provide an optimistic near- and long-term view for the industry, suggesting that all is quiet on the West Texas Intermediate (WTI) front. And that is not a positive development for the nation’s energy king status.
A Look at the Numbers
Around the world, crude oil companies are already slashing their budgets. Royal Dutch Shell is cutting spending by 20%, or about $5 billion. Norway’s Equinor, France’s Total SA, and Canada’s Suncor Energy have introduced comparable measures. Chevron and ExxonMobil have confirmed they are planning to take a chainsaw to their budgets in response to oil prices that hover in the $20 range. Goldman Sachs is warning that the changes will be done in two phases. The first stage is presently visible, with a total of $19 billion in cuts. The second round of declines – job losses and steep capital expenditure reductions – will start as soon as prices fall even further.
In the U.S., the more technical side of the data is concerning for the state of the nation’s shale revolution that has been dominant over the last few years.
Baker Hughes reported that the total number of oil rigs fell by 19 to 664, while the total number of active gas rigs dipped by one to 106. In total, there are 244 fewer oil and gas rigs compared to the same time a year ago.
This month, nearly 40 exploration and production companies filed fewer than 200 drilling permits. In 2019, about 1,000 of these firms filed an average of 230 drilling permits a week.
According to the Bureau of Land Management (BLM), oil and gas lease sales offered by the federal government in three states (Montana, Nevada, and Wyoming) generated bids on just 40% of the approximately 200,000 acres offered. This comes one week after the U.S. held an auction for leases in the Gulf of Mexico and attracted the lowest number of high bids for a domestic offshore auction in four years. Taxpayer advocacy groups are urging the White House to delay the sale to garner a better return in the future.
Brace for Bankruptcy?
Raymond James prognosticated that this environment could trigger a collapse among the large-scale firms:
“There is no sugar coating it, U.S. oilfield activity will collapse with oil prices well below $30 WTI. However, the declines will be far more dramatic than these initial cuts and we stress that these announcements skew towards larger cap, better hedged and capitalized operators. Total U.S. capex is likely to fall in excess of 65% with a WTI price persisting in the $20s.”
American oilfield services and drilling businesses are bracing for a $32 billion tsunami of debt that is due between now and 2024, and experts say that this is some of the most high-risk debt on the market. Moreover, the overall U.S. oil and gas industry possesses roughly $86 billion of rated debt due within the next four years, which is the highest of any sector.
To understand the severity of the situation on the ground, take a gander at the VanEck Vectors Oil Services ETF. The exchange-traded fund is down nearly 75% year-to-date to around $4.
With crude prices trading at 20-year lows, it will be nearly impossible for these firms to survive.
A Texas Tea Toast
Even if the federal government’s $2 trillion stimulus plan contains a lifeline for the energy sector, any funds will only delay the inevitable. There are three crucial numbers to point out: 13 million, 14 million, and 15 million. The U.S. is still pumping about 13 million barrels per day (BPD) into global crude markets. International oil demand is expected to contract 14 million BPD this year. The estimated global surplus will top 15 million BPD in 2020.
The U.S. maintains an advantage over its foreign rivals in that companies can break-even with $30-$40 oil, compared to other nations’ $50-$60 range. But if some forecasts are accurate, and black gold crashes to as low $5, you can say goodbye to the energy revolution. It was fun while it lasted, and leftists will be pleased by the news. Perhaps we can start this thing up again in a couple of years when Saudi Arabia and Russia stop acting like schoolgirls, and the consequences from the COVID-19 pandemic vanish.
Here is a Texas Tea toast to bubblin’ crude in the meantime.
Read more from Andrew Moran.
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