U.S. oil prices at below $50 and now even below $45 a barrel could cause concerns about the debt levels of some energy companies, Nasdaq energy analyst Tamar Essner told CNBC on Wednesday.
“Credit markets have held up a lot better than the energy equity markets right now, so that tells you that credit investors out there believe in the oil story much more so than energy equity investors do right now,” Essner said.
Consumers in the U.S. like the low gasoline prices that come with lower oil prices, but a slide in the price of oil has a broader impact on the economy, Essner said.
Some of the newer U.S. shale producers are probably deep into cash-flow negative at the current oil prices of $43 a barrel WTI Crude, although the energy industry as a whole is “in a lot stronger position” today than it was in the price crash of 2014, according to the energy analyst.
“A lot of the debt has been put in a much more consolidated position. We’ve just had a round of credit redetermination in the fall when prices were higher, so that should buy us some time in the market as well,” Essner said, referring to the banks’ twice-yearly borrowing base redetermination of energy companies. Related: Argus Remains Bullish On Oil As Prices Plunge Below $45
Over the past few weeks, when oil prices were falling due to fears that the OPEC+ production cuts won’t be enough to rebalance the oil market, some companies announced their 2019 capital budget plans.
Many of those companies said they would be cutting spending and the number of rigs, Essner said, noting that lower spending levels will ultimately result in a lower pace of oil production growth, but it will take time. The U.S. shale patch has a six to nine months lag time between lower oil prices actually materializing into lower production, the analyst told CNBC.
After plunging 7 percent on Christmas Eve, oil prices were up on the second day of Christmas, with WTI Crude up 3.67 percent at $44.09 and Brent Crude up 2.40 percent at $51.99 at 09:58 a.m. EST on Wednesday.
By Tsvetana Paraskova for Oilprice.com
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Still, US shale oil producers will never stop production for two reasons. The first is that the US shale oil industry is not judged by standard criteria of economics and profit that govern conventional oil companies otherwise it would have been declared bankrupt years ago given the hundreds of billions of dollars it owes Wall Street. It has to keep producing irrespective of oil prices just to remain afloat. In other words, the US shale industry works on the principle of “robbing Peter to pay Paul” supported by Wall Street investors.
The second reason is that despite being very deeply in debt, the US shale oil industry will continue operating because it gives the United States a say in the global oil prices and markets along with Russia and Saudi Arabia. Without that, the US Energy Information Administration (EIA) will not be able to hype about the US becoming the world’s top oil producer or the US is now a net oil exporter.
This raises huge question marks about the future of the US shale industry. If the industry is still not profitable – after a decade of drilling, after major efficiency improvements since 2014, and after a sharp rebound in oil prices – when will it ever be profitable? Is there something fundamentally problematic about the nature of shale drilling, which suffers from steep decline rates over relatively short periods of time and requires constant spending and drilling to maintain?
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London