Points Raised1. Can oil contine at current prices? No, it is impossible, depletion rates on shale alone will take out most of the surplus given the fall in rig count. Lack of investment and development elsewhere, not to mention insolvencies will result in an oil shortall later this year. This is all but inevitable now.
2. Could the price of oil fall again shorter term and what does this tell us? Yes, it could easily, it tells us nothing, short term movements are inherently unpredicatable.
3. Are Ithaca's credit lines at risk? No. The debt looks huge relative to market cap, but this is one of the issues of debt reporting. When the price is hammered down the debt looks huge, but relative to assets and forward earnings the debt is manageable. The sooner it is reduced the better of course. In terms cutting credit lines, there is a lot of low hanging fruit out there in the oil sector in terms of credit risk, which will be picked first, Ithaca is not the low hanging fruit. Of course an oil price in the low $30s by the end of this year would be a problem for Ithaca. But global production would need to have remained unchanged, despite widespread oil sector financial carnage, if this were to happen - this is highly unlikely.
4. Have recent renewable developmentsultimately doomed the oil sector now? In 20 years time oil dependency will have reduced considerably. In about 5 years time a steady reduction in oil usage will begin to become apparent, although only incrementally at first. The very gradual drop off in oil demand should broadly coincide with the depletion of the current major oil fields in the gulf which are not replaceable.
Is there a risk that companies like Ithaca will have the rug pulled from under them over the next 5 years due to a global switchover to renewables? No, virtually none, but from 5 to 10 years out the unfolding supply and demand situation will need to be watched closely. My own view is that even as oil demand starts to gradually fall in a few years time, the long term impact of the lack of investment during the current price crash; the inevitable hesitancy to invest sufficiently going forward following recent/current events and the irreplaceability of the major gulf fields longer term will keep oil prices high for a decade or two, nothwithstanding the usual price fluctuations.
Doug