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Oil Price Plunge Reignites Fears for Indebted Shale Companies
Submitted by Nick Cunningham via OilPrice.com,
The latest fall in oil prices is once again putting pressure on indebted shale companies.
After falling from over $100 per barrel down to $43 per barrel at its lowest point in March of this year, WTI prices rebounded with a 40 percent rise, trading for more or less $60 per barrel for May and June.
The rebound appeared to spell the end to the worst of the glut, with production plateauing, if not falling, and demand starting to rise. Although estimates were all over the map, many saw a strong bounce coming in the oil markets, with some even predicting supply shortages before the end of the year.
A few companies donned a renewed sense of confidence, suggesting that they would start drilling again with oil prices in the $60-per-barrel range.
Still, mountains of debt had accumulated across the U.S. shale sector. That didn’t go away but was sort of on hold as drillers, and their financial backers, hoped that further price increases would allow them to pay down debt. To stay afloat, drillers issued new debt and equity.
But the renewed plunge in oil prices is kicking off a fresh round of debt concerns. Bloomberg reported that energy-related junk bonds have lost 3 percent of their value in the last two weeks, after WTI crashed to nearly $51 per barrel and Brent fell below $57. Bond traders are avoiding high-yield, high-risk debt, and yields have jumped to nearly 10 percent, a level normally associated with default risk.
“The energy sector of the high-yield market continues to be a silo of misery,” Margie Patel with Wells Capital Management, told Bloomberg telephone interview. “If we stay near these levels, marginal high-cost producers won’t be able to survive.”
Bonds due in 2020 for Energy XXI, a driller in Louisiana, are now trading at 84.5 cents on the dollar, and Oklahoma-based SandRidge has seen its debt fall to 87 cents on the dollar.
The markets will get a clearer picture as second quarter earnings season arrives, as indebted shale companies provide some clues into their ongoing struggles.
However, the outlook moving forward may be gloomier than whatever they report in the second quarter.
The swift drop in oil prices over the past year was driven by tepid demand and surging supplies. But the renewed drop has occurred because of broader market turmoil, which comes on top of the ongoing glut. Greece has defaulted on its debt and the stage is set for its exit from the euro, with unknown ramifications for the EU. That could weaken oil prices through a stronger dollar, falling EU demand, and a higher perception of risk.
More concerning is the meltdown in the Chinese financial system. The Shanghai Composite and has lost more than 30 percent of its value since June and the Shenzhen Composite has seen 40 percent of its value vanish into thin air. While the precipitous decline raised worries at first and saw modest action from the government, the turmoil is quickly turning into a meltdown, sparking panic in China and around the world.
Now Chinese regulators, in a desperate attempt to stem the outflows, have banned large shareholders selling their stakes for at least five months. Companies representing roughly 45 percent of the two exchanges (or $2.4 trillion) are suspending trading, trying to avoid more sell offs.
"We are seeing a panic in China. It goes back to 2008, when it always seemed the Chinese were really in control of their economy. They were the first ones out there with a stimulus, and now it looks like they don't know what to do,” oil historian and vice chairman of IHS said on CNBC on July 8.
Of course, as the largest oil importer in the world, China has massive influence over prices. A sharp downturn could crush oil prices.
That would ensure larger default rates in the shale industry.
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It's too bad cheap oil isn't translating into cheap gas at the pumps. I want my tax break.
Nothing is based on true cost anymore- its all about the deal monopolies make with the central planners about what their fake markets will allow.
^ and time is just about up.
The dead cat will bounce another time or two before the bond market goes strange and the fun begins.....
The flood of bankruptcies for the related rig moving service companies has already started.
At some point, trying to RIG ALL the MARKETS ALL THE TIME
is going to HIT A BRICK WALL.
That is why they want to ELIMINATE CASH.
Because at that point, the only way to TOTALLY CONTROL EVERYTHING is to CONTROL ALL MEANS OF PURCHASE
It's called TOTALITARIANISM
If the price of oul remains low, some oil investors will have to travel to the Hamptons by bus, the Hampton Jitney, instead of helicopter.
It is becoming a big oily mess.
Me thinks it might be a deflationary ploy to boost the ponzi dollar and hammer the BRICs in the process.
Truth be told: Nothing happens without a reason. Those NWO folks know what they are doing,even if it is wrong.
Marginal high cost producers always fail; that's what markets are for; to provide the Darwinian Selection. Oh, and by the way; I'm long Crude oil for Dec. '16. And, if I have to accept my losses and exit; I'll report it right here; just like i report the money I make shorting the stupid ass S&P500 rallies. Cheers. Why am I Long Oil ? Too fucking many stupid people have decided it's going down 'forever". I'm a contrarian. Now you can tell your mother you met a real contrarian. this is what they do; they go against the mob opinion.
China's strategic petroleum reserve is getting close to objective and Iran is coming out of the box and the banks are getting close to the end of the derivatives issued one year ago
March will not be the low
Agreed.
As goes economic growth so goes oil demand...in the shitter for both is a distinct possibility now, across the board.
Unfortunately for the shale drillers, all PR hype aside, that oil costs a fuck-ton more to get out of the ground than anything in the ME or Russia.
First, I think we've just learned from Greece that there are no defaults anymore, the shale companies will just be 'in arrears'. Which brings me to my second point - perhaps at this point they should hold referendums with their shareholders about whether to accept certain austerity measures in return for a bailout from the IMF or the ECB. It looks like Varoufakis might be available for some consulting gigs on how to approach this.
Another great chart with no designated term for the Y axis. All we know is that "something" has gone from 400 to 900 in the past year.
The Y axis would be basis points.
Carpetbag. Shale workers prolly bought everything on credit.
None would have had a thing if they hadn't tried.
Some are now called BILLIONAIRES.
"And Zero Hedge applauds the Banksters."
Clearly my down arrows remain insufficient...
You can thank the Nobel Prize Winner's full spectrum war against Russia.
Forward
So when do they start losing the benefit of their futures (derivative) contracts at the start of the price crash? August? That is when we will see what is real and what is fiction.
Too big to fail shale companies (TBTFS) will be getting their bailout,soon..In the meantime,the more money they lose,the more secure their future is,because losing 100 billion dollars in Amerika today guarantees your future success,whereas losing only 100 thousand dollars,will only guarantee that you're an idiot..
Who would be the TBTFS? Most are independent and gas exploration.
...just a note regarding the Baker Hughes rig counts: they denote active drilling rigs and bored-but-not-fracked wells. Today, Friday, in the Bakken there are 72 active rigs, however the number of unfracked bores is well over 1000. If they stopped all drilling rigs, at the current production monthly bore count, there are enough unfracked bores to complete for the next 12-14 months....literally if they stopped drilling there is still enough wells to complete for over a year. It is that potential production that makes it hard to estimate Bop/d going forward in most of the shale plays in North America; it also, to a large degree, is what continues to surprise-on the upside-the amount of production coming online every month.
There is a massive amount of over production in North America.....today and for at least another 18-24 months.
Yup. Time to lease that that F350 for 24 months with 15k in discounts. /sarc
So exciting. Wish California would get off it's self made Oil Island.
Gas is going to go up $0.50-$0.60 within the week in Cali!
"Devastating!"
So I'm gonna guess more job losses and bankruptcies are Bullish?
Last I heard the movement to export US crude had 61 Red team and 7 Blue team on board. The council of Foreign relations, Forbes, Business insider, general MSM and Now the EU are promoting it (for the children). All they probably need is a huge layoff disaster coupled with a humanitarian disaster in Europe and one could see where they can make it happen.
Then again, they pass trade bills that we're not allowed to read so chances are they will just pass it anyway at this point.