Oil Turning Back to Bear Erases $100 Billion From Shale Drillers By Bloomberg
Oil slipped back into a bear market Thursday, disappointing U.S. shale drillers that pinned their hopes on higher prices.
West Texas Intermediate, the benchmark U.S. contract, tumbled 21 percent since June 10 to $48.45 a barrel, erasing more than $100 billion in market value from the companies in the Bloomberg Intelligence North America Independent Explorers and Producers Index.
Crude's recovery fizzled amid a worldwide glut that shows little sign of abating. U.S. production remains near the highest level in four decades, output from Saudi Arabia and Iraq surged to record levels, and Iran is focused on resuming exports after reaching a nuclear agreement with world powers.
"The commodity price is telling the U.S. shale sector to shrink," said Subash Chandra, an oil analyst at Guggenheim Securities LLC in New York. "Barrels from the U.S. are on a collision course with barrels coming out of Iran, Saudi Arabia and elsewhere."
U.S. shale drillers have slashed spending and cut workers this year as prices fell. Most companies in the index spend money faster than they earn it, making up the difference with debt, according to data compiled by Bloomberg. Of the $207 billion in bonds issued by members of the BI index, more than $24 billion is trading at distressed levels, meaning yields are 10 percentage points above U.S. Treasuries, as investors demand higher returns to compensate for the risk of not getting repaid.
"Just when you thought it was safe to go back into the oil patch -- whack!" Phil Flynn, senior market analyst for Price Futures Group Inc., said by phone from Chicago. "The bear market is definitely putting another round of fear into the shale patch and the bankers of the shale patch."
Oil Warning: The Crash Could Be the Worst in More Than 45 Years
There's only one thing holding back a price rebound. It's a big thing.
Morgan Stanley has been pretty pessimistic about oil prices in 2015, drawing comparisons with the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned-but definitely no worse.
This week, a revision: It could be much worse.
Until recently, confidence in a strong recovery for oil prices-and oil companies-had been pretty high, wrote such analysts as Martijn Rats and Haythem Rashed in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.
1. Demand will rise: Check
In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.
In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year's average, according to the report.
2. Spending on new oil will fall: Check
In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.
In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone, listed oil companies have cut about $129 billion in capital expenditures.
3. Stock prices remain low: Check
In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.
In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.
4. Oil supply will drop: Uh-oh
In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.
In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.
OPEC Production Surges in 2015
For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn't have much more spare capacity to fill and because oil stocks have already been hammered.
But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more-"far worse than in 1986."
"In that case," they wrote, "there would be little in analysable history that could be a guide" for what's to come.
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