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Page added on February 19, 2016
Oil Industry Faces an Existential Crisis
The Saudis may go public, OPEC’s in disarray, the U.S. is suddenly a global exporter, and shale drillers are seeking lifelines from investors as banks abandon them.
Welcome to oil’s new world order, full of stresses, strains and fractures. For leaders gathering in Houston next week at the IHS CERAWeek conference — often dubbed the Davos of the energy industry — a key question is: what will break first? Will it be the balance sheets of big U.S. shale companies? The treasuries of Venezuela and Nigeria? The resolve of Saudi Arabia, whose recent deal with Russia to freeze output levels offered the first hint of a rethink?
After watching prices crash through floor after floor in the worst slump for a generation, the industry is eager for answers. Insiders say it’s not too hard to visualize what markets might look like after the storm — say five years down the line, when today’s cost-cutting creates a supply vacuum that will push up prices. But it’s what happens in the meantime that’s got them scratching their heads.
“This is a weird thing for a market analyst to say because it’s usually the opposite case, but I have more conviction in my five-year outlook than my one-year outlook,” said Mike Wittner, head of oil market research for Societe Generale SA. “Maybe I’m letting my head get turned upside down by the last couple months.”
Seeking clarity at closed-door sessions, cocktail hours and water-coolers in Houston will be some of the industry’s biggest players, from Saudi Petroleum Minister Ali al-Naimi to Royal Dutch Shell Plc Chief Executive Officer Ben Van Beurden.
In a less volatile year, the long-term viability of fossil fuels might have been high on their agenda after December’s breakthrough climate deal in Paris. But within the industry, that debate has “fallen into the abyss of $27 oil,” said Deborah Gordon, director of the Carnegie Endowment for International Peace’s energy and climate program.
“It seems like it’s never a good time,” she said. “You can’t have these conversations when oil is $125 because then you can’t get it out of the ground quickly enough. And you can’t have it at $27 because you’re just trying to survive.”
Shale Boom
U.S. shale drillers had a key role in bringing prices that low, by adding 4 million barrels a day in less than four years — almost like a new OPEC member materializing overnight. Natural gas has mirrored the pattern, with surging output and plunging prices.
Now the companies are victims of their own success. As many as 74 face significant difficulties in sustaining debt, according to Moody’s Investors Service. The effective yield of the Bank of America Merrill Lynch High-Yield Energy Index rose to more than 21 percent on Feb. 11, the most since it was created in 1997.
So far, shale bankruptcies have been limited to smaller outfits like Magnum Hunter Resources Corp. and Swift Energy Inc. Some investors are worried that Chesapeake Energy Corp., the second-largest natural gas producer in the U.S., could be the first big fish out of the water: its shares have plunged 90 percent in the past year.
The one thing the stress on companies hasn’t done is destroy production. Engineers have found ways to lower costs and boost output at oil wells, allowing cash-starved drillers to keep enough rigs active so that output is still within 5 percent of last year’s high.
OPEC Output
Meanwhile, on the international scene, the Saudi-Russian accord announced Tuesday, to which Venezuela and Qatar have also signed up, would cap production at January’s levels — a record high in Russia’s case, and not far off for the Saudis. Iran isn’t a party to the plan, and its imminent return to world markets could add to the glut. Historically the No. 2 OPEC producer, the Islamic Republic is preparing to ramp up exports after sanctions were lifted last month.
Brent crude failed to sustain a rally after the plan was announced, suggesting that traders don’t see any change in the underlying picture: Suddenly, there’s oil everywhere. Without a rebound in prices, the consequences for governments — from Russia to Nigeria to Venezuela — range from grim to catastrophic.
Russia has a relatively diversified economy, but it’s still running the biggest deficit in five years, and selling assets to finance a stimulus program. Nigeria, which depends on oil for almost all of its exports, is battling to stave off a currency devaluation and pleading for development loans to replace the missing petrodollars. Venezuela is even worse off, with debt defaults looming and an inflation rate estimated by the International Monetary Fund at 275 percent.
“You’ve got half of OPEC in existential crisis as to whether they can be viable governments at this point,” said Allen Gilmer, chief executive officer of energy consulting firm Drilling Info Inc. in Austin, Texas.
Saudi Arabia
As usual in an OPEC meltdown, all eyes have turned to Saudi Arabia, the world’s top exporter and architect of the cartel’s keep-pumping strategy as it seeks to defend market share.
While the Saudis have deeper pockets than most of their OPEC peers, they haven’t been immune from the price turmoil — especially with wars in Yemen and Syria to finance. Reserves tumbled by about $115 billion last year. Saudi rulers have slashed subsidies, announced new taxes and said they’re even considering selling shares in the state oil giant, Saudi Aramco.
“We don’t want a reduction in supply,” Al-Naimi said after the Russian deal. But he also said it was only the “beginning of a process.”
The Saudi minister will address IHS CERAWeek’s main hall on Tuesday morning, in the week’s most eagerly anticipated event. A packed audience will be hoping he elaborates.
“There’s a short fix, and a long fix,” said Andrew Lebow, a senior partner at Commodity Research Group. “Are we going for the short fix of a production cut, or the long-haul slog of rebalancing the market? That’s what everyone at CERA is going to be talking about. And it’s all dependent on the Saudis.”
15 Comments on "Oil Industry Faces an Existential Crisis"
Davy on Fri, 19th Feb 2016 6:16 am
“Markets Ignore Fundamentals And Chase Headlines Because They Are Dying”
http://www.alt-market.com/articles/2810-markets-ignore-fundamentals-and-chase-headlines-because-they-are-dying
“Normalcy bias is a rather horrifying thing. It is so frightening because it is so final; much like death, there is simply no coming back. Rather than a physical death, normalcy bias represents the death of reason and simple observation. It is the death of the mind and cognitive thought instead of the death of the body.”
“This atmosphere of deluded self interest also generates a cult-like collectivist attitude. There is a lot of mutual back scratching and mutual ego stroking in the MSM; a kind of inbred conduit of regurgitated arguments and unoriginal talking points, and people in the club rarely step out of line because they not only hurt their own investment future and career, they also hurt everyone in their professional circles. Meaning, no more cocktail party invitations to the Forbes rumpus room…”
“No society wants to admit economic failure or economic sabotage, and this is why the con-game is able to continue in the face of so much concrete truth. Ultimately, the market trends and economic trends will flow into the negative. In the meantime, expect massive market rallies, rallies which will then disintegrate in a matter of days. And, whatever happens, never take what mainstream economists say very seriously. They have failed the public for long enough.”
Davy on Fri, 19th Feb 2016 6:16 am
“Markets Ignore Fundamentals And Chase Headlines Because They Are Dying”
http://www.alt-market.com/articles/2810-markets-ignore-fundamentals-and-chase-headlines-because-they-are-dying
“Here is the problem presented in the mainstream; what came first, the chicken or the egg? Did falling demand lead to oversupply and thus a fall in prices? Or, is demand remaining steady and is overproduction the cause of falling prices? Yes, let’s confuse the issue instead of looking at the obvious.”
“In fact, both can and often do exist at the same time, though one problem usually feeds the other. Falling demand does tend to result in oversupply in any particular sector of the economy. The bottom line, however, is that in our current crisis demand is the driving force and supply is a secondary issue. Supply is NOT the driving force behind the volatility in oil markets. Period.”
“Shipping companies like Maersk Lines have already publicly admitted that falling global demand is the core problem behind falling rates and that supply is a secondary driver. They view the current financial crisis to be “worse than 2008”. The fact that the largest shipping company in the world is warning of falling demand does not seem to be having any effect on the mainstream talking heads, though.”
“Stock markets are crashing, there is no other way to paint it. They are crashing incrementally, but crashing nonetheless. When you have violent swings in equities and commodities between 5 percent and 10 percent a day, then something is very wrong with your economy and has been wrong for some time. If global consumption and demand were really steady or growing, then you would not see the kind of systemic backlash in the financial system that we are now seeing. If companies listed on the Dow were making legitimate profits due to a healthy consumer base and enjoying solid expansion, stocks would not be increasingly volatile. If investors and mainstream analysts actually looked at the real numbers in demand (among other things), then the strange behavior in markets would be easy for them to understand. They will not look at such numbers until it is too late.”
rockman on Fri, 19th Feb 2016 6:29 am
“…the U.S. is suddenly a global exporter…” Stopped reading at this point. The Bloomberg writer is either incredibly stupid or a liar. Since the oil export “ban” was signed into law the US has exported 1.5 BILLION BBLS of oil according to the same govt that wrote the “ban” law.
One thing you have to give the Big B credit for: they are very consistent in their bullshit. LOL.
Davy on Fri, 19th Feb 2016 6:48 am
Industry bellwether admits down turn. I would ask how that bodes for oil demand growth? NOT GOOD.
“Deere In Headlights After Guidance Cut: Sees 10% Sales Drop Due To “Downturn In Global Farm Economy”
http://www.zerohedge.com/news/2016-02-19/deere-headlights-after-guidance-cut-expects-10-sales-drop-due-downturn-global-farm-e
“It is not just Caterpillar that continues to post horrendous numbers, and has now recorded 38 consecutive months of declining Y/Y sales, double the length of the contraction of the great financial crisis. Moments ago heavy farm equipment maker Deere likewise shocked its investors with a round of terrible numbers”
“Here is how CEO Samuel Allen tried to spin the cut in guidance which DE had previously seen at just -7%: “Although Deere expects another challenging year in 2016, our forecast represents a level of performance much better than we have experienced in previous downturns,” Allen said.”
“Downturn? We thought the Fed was hiking because of the “strong recovery.”
Nony on Fri, 19th Feb 2016 8:12 am
Crude is back under $30.
shortonoil on Fri, 19th Feb 2016 8:35 am
“Suddenly, there’s oil everywhere.”
As long as the industry remains focused on the number of barrels in existence, rather then how well they can power the economy they will remain confused. The utility of petroleum has been falling since the first barrel was extracted, and has now fallen to the point where it can no longer power a growing economy. Without growth the present system fails, and the petroleum industry with it. The industry is still clinging to a hundred year old paradigm; one as outdated as the Earth is the center of the Universe. With each passing day their product is growing less valuable to the world; with each passing day they are fading into oblivion. The inevitability of their demise is written into the laws of nature; their confusion arises not for a lack of writing on the wall – it arises from their unwillingness to read it!
http://www.thehillsgroup.org/
paulo1 on Fri, 19th Feb 2016 8:42 am
Directed low interest rates chasing some kind of yield (any kind of yield) makes for malinvestment, bubbles, and collapse.
Looking back, what did the politicians and Fed think could happen? Or, are they as stupid as this writer?
Should have helped home owners and left the banks to rot.
makati1 on Fri, 19th Feb 2016 8:54 am
paulo1, or maybe it is all part of the great leveling? After all, the financial system has to be taken down along with the world economy before a One World Government can have a chance. TPTB have no national patriotism or ties, only to wealth and power. That Americans should expect to be an exception, is the height of arrogance and stupidity.
But, Mother Nature may foil their plans by taking everything from all of us, including possibly, our very existence, by forcing us to live by the real laws of the universe. We shall see.
Kenz300 on Fri, 19th Feb 2016 9:33 am
Fossil fuels are poisoning the air, land and water we all need to survive.
Climate Change is real…… we need to deal with the cause (fossil fuels)
100% electric transportation and 100% solar by 2030
https://www.youtube.com/watch?v=RBkND76J91k
marmico on Fri, 19th Feb 2016 9:35 am
Should have helped home owners and left the banks to rot.
Really. The 30 year conventional mortgage rate has declined from 6.5% pre-Lehman collapse to under 4% for the last year. That’s a lot of help for borrowers over the last 7.5 years.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=3nnB
peakyeast on Fri, 19th Feb 2016 10:11 am
@marm: I dont know how it is in the USA – but here in Denmark the lenders of mortages also has very low interest.
However, they more than make up for that by increasing expenses on obtaining loan, refinancing the loans, and just having the loan itself.
At the same time the government has significant reduced the tax reduction from paying interest.
Also the government taxation of property and housing has increased continuously for the past many years – even during 2008 crisis – they simply use fantasy valuations of the real-estate.
So the houseowners have not really saved a “lot” of money – at least here in Denmark.
twocats on Fri, 19th Feb 2016 10:45 am
The bind that is vexing central bankers is this:
Deflation on one side: low oil price is like the housing bubble collapse, every month that goes by with no significant “rebound” in the price of oil (price of houses) is stressing the energy companies (real estate complex) and the financial assets that have bet on them, mainly HY bond market (CDOs, securitized debt).
Inflation on the other: the cost of most things we buy (besides oil, which is only about 7% of household expenditures I believe) is going up. I don’t have the numbers for education and medical care, but I bet they are north of 2% every year. And in the past two years, the rising cost of two core items: food and shelter, has become a major issue. Rent inflation is up OVER 3% Year over Year 2014 and 15, and well above 2% for 2012 and 2013, and never really slowed down (but for a brief couple years) from the 1999 all the way to 2009 period.
If they don’t launch a new QE we could see major banks implode. If they do launch a new QE we could see landlords hung in the street. I’m betting they go QE and hope the police can protect them.
Plantagenet on Fri, 19th Feb 2016 11:26 am
Interesting that after a year of oil glut and a collapse in oil prices, US shale production is only down 5%.
That probably means the oil glut can go on quite a bit longer.
Cheers!
twocats on Fri, 19th Feb 2016 12:44 pm
I agree with you Planty, I’m in awe of how long the glut has continued. The December numbers put the decline now at around 8% I think, but that’s still super-tiny as far as I’m concerned.
Another crazy part is this from the article:
“The effective yield of the Bank of America Merrill Lynch High-Yield Energy Index rose to more than 21 percent on Feb. 11, the most since it was created in 1997.”
21%!!! National average for CREDIT CARD INTEREST is 15%!!
I’m not sure what’s more impressive, the fact that they can continue to pump so much, or that they can keep up cash flow with such a high interest rate.
Dredd on Fri, 19th Feb 2016 1:18 pm
Propaganda is a tongue twister.