Saudi-Russian Price War Target US Shale Collapse, But Will Lead to Higher Oil Prices By Nick Cunningham Oil Price, March 11, 2020

 

U.S. Shale Collapse Will Lead To Higher Oil Prices

By Nick Cunningham

March 10, 2020, 8:00 PM CDT

U.S. shale growth is about to decline, becoming an immediate victim of the Saudi-Russian price war.

Saudi Aramco said that it would increase oil production to 12.3 million barrels per day (mb/d) in April, a shocking escalation of the war for market share. That level of output is believed to be beyond what Aramco can produce on a sustainable basis. In other words, Saudi Arabia is going all-out to flood the market.

Also, Saudi energy minister Prince Abdulaziz bin Salman didn’t sound interested in meeting with Russia anytime soon. “I fail to see the wisdom for holding meetings in May-June that would only demonstrate our failure in attending to what we should have done in a crisis like this and taking the necessary measures,” Prince Abdulaziz told Reuters.

According to Energy Intelligence, Saudi Arabia is conducting budgeting exercises to game out scenarios in which oil crashes to between $12 to $20 per barrel, and will even look at an extreme scenario in which oil falls below $10.

Russia says it can withstand the price war at $25 to $30 per barrel for 6 to 10 years. Neither side appears willing to budge.

“Monday will go down as one of the bleakest market days in the history of the energy sector,” Raymond James wrote in a note. “Was this capitulation day? It certainly feels like it... it is hard to imagine how much worse sentiment can get.”

As a result, the immediate victim will be U.S. shale. “[O]il should bottom out when producers begin physically shutting in wells, which is indeed what set the floor four years ago,” the investment bank added.

The reaction was swift. With share prices in freefall, the number of shale companies announcing budget cuts multiplied at the start of the week. Diamondback Energy and Parsley Energy immediately announced plans to cut spending and reduce drilling activity.

Canadian oil company Cenovus Energy slashed 2020 capex by 32 percent and its production guidance by 5 percent. Ovintiv said it would cut spending and tried to reassure skittish investors that it had enough liquidity. Marathon Oil cut spending by $500 million.

Even Chevron admitted that it might need to cut spending, just days after it unveiled lofty goals on free cash flow over the next five years. “We are reviewing alternatives to reduce capital expenditures, that are expected to lower short-term production and preserve long-term value,” Chevron said in a statement to Reuters late on Monday. Chevron was the first oil major to suggest that it might cut spending, and the oil giant said that it needs $55 per barrel in order to cover its spending and shareholder payouts.

At these prices almost no shale well drilled today can make money. Rystad Energy says just a handful of companies have breakevens lower than today’s oil price. Friezo Loughrey of data firm Oil Well Partners LLC told Bloomberg that Permian breakevens are closer to $68 per barrel if investors want an adequate return within 24 months. Today, prices are trading at half of that.

“Many US fracking companies already had their backs to the wall before the price slump due to high debts and financing difficulties,” Commerzbank wrote in a note. “Drilling activity declined continuously until mid-January, and has since stagnated at a low level.”

The one-two combo of the coronavirus pandemic and the Saudi-Russia price war could deliver a knockout blow to U.S. shale.

But perspectives on the impact on production vary. JBC Energy said that they “prefer a more cautious call on US supply declines,” adding that it may take a few months before production begins to fall.

But others see an immediate retreat. “A decline in US shale oil production of 1-2m bl/day from current total US oil production of 13.1m bl/day is natural to expect,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement. “We now think that a last-minute deal between Russia and OPEC before the expiry of the current cuts at the end of March 2020 is very unlikely.

Russia has probably firmly decided that now is the time to pull away the rug from under the feet of the shale oil producers.

So, now is the time for the second shale oil reset.”

https://oilprice.com/Energy/Oil-Prices/US-Shale-Collapse-Will-Lead-To-Higher-Oil-Prices.html

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Oil Price Crash: 50% Of U.S. Shale Could Go Bankrupt

By Nick Cunningham of Oilprice.com

March 9, 2020, at 8:00 am ET.

It’s one for the history books.

Oil opened on Monday down roughly 25 percent, the sharpest decline in decades, and broader financial markets fell so precipitously that the circuit breakers put in place during times of volatility tripped, temporarily halting trading.

The list of adjectives available to describe what is happening to the oil market is not adequate. There are now multiple crises unfolding at the same time.

First, there is obviously a health crisis – the coronavirus continues to spread. Large swathes of northern Italy are now on lockdown. The number of cases in the U.S. has surged, and could explode in the coming days. Mandatory lockdowns may not be far off. The Trump administration is asleep at the wheel, actively trying to play down the extent of the crisis.

Second, there is a brewing economic crisis. China shut down parts of its economy in January and February. Parts of Europe followed. The U.S. is next.

The Dow Jones has fallen by more than 16 percent in the past week, and markets have quickly shifted from concern to full blown panic.

Third, if all of that is not enough, OPEC and Russia just added on an oil supply crisis. The collapse of talks last week and the ensuing price war has WTI down to $33 per barrel as of midday on Monday, down from $45 last Thursday on the eve of the OPEC+ talks. OPEC and Russia have said that all restraints on production expire at the end of the month, and everyone can produce at will. Oil could easily be in the $20s at any moment (and might be by the time this piece is published).

For the U.S. oil industry, this is a historic crisis. It has the ingredients to be far worse than the 2008 financial meltdown. At that time, a sharp contraction in the global economy blew a hole in the market. But OPEC responded by cutting production.

This time, that same potential for an economic calamity is present, but there is an oil price war occurring simultaneously.

A decade ago, the shale industry barely existed, and falling oil prices cushioned the blow to the U.S. economy by making energy cheaper. Today, an oil market bust could pretty quickly plunge Texas, North Dakota and Appalachia, among other places, into a recession.

Analysts are now predicting that the Eurozone, at a minimum, is heading for an economic recession. France’s finance minister Bruno Le Maire said that Europe needs a “call to arms” to defend the economy.

The pain for U.S. drillers was immediately visible when markets opened on Monday. Deep losses hit everyone. “We have taken the unprecedented steps of bringing our full coverage group to Hold or Sell,” Neal Dingmann of SunTrust said, according to Bloomberg. He called it “energy Armageddon.”

“Not one company in our coverage can keep production flat for more than a few months while spending within cash flow at $35 WTI,” Charles Meade of Johnson Rice & Co. said, according to Bloomberg.

“The U.S. is going to be the collateral damage here. The producers here are going to be suffering so much,” Amrita Sen, chief oil analyst at Energy Aspects, told Bloomberg from Houston. “They were already suffering and there’s no lending. There’s no money right now for them. This is really going to crush them.”

On Monday, Diamondback Energy said that it would “immediately” slash capex and cut back on completion crews and rigs. 

Shale drillers were already facing substantial hurdles with cash flow problems and maturing debt. “We are preparing for two years of low prices and will make the necessary adjustments to maintain our great balance sheet,” Pioneer Natural Resources’ CEO Scott Sheffield told the Washington Post. Pioneer’s share price cratered by 32 percent on Monday.

Assuming prices stay low, Mr Sheffield said that “Probably 50% of the public E&Ps will go bankrupt over the next two years.".

By Nick Cunningham of Oilprice.com

https://oilprice.com/Energy/Crude-Oil/Oil-Price-Crash-50-Of-US-Shale-Could-Go-Bankrupt.html

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