Post by
braincloud on Feb 10, 2016 9:22am
Oil production
Remember that the US is still a net importer of oil , not quite half their requirement is still imported. The production rate IMO is unsustainable not only in the US but globally. Take the likes of CHK. They had record production in their last annual report even though they were negative cash flow for the past 2 years. How can that be? There is a strong motivation for indebted oil companies to produce to service debt. In the end if they can't make money at these levels the debt will continue to mount and eventually the music stops when bonds are defaulted on , banks call their loans and further financing become too expensive. There's no doubt in my mind that cheap money has exacerbated this level of over production. The oil companies fueled with the appetite to get yield ,invested in marginal shale and the returns "on paper" looked great. Now the oil companies are pumping for all they are worth to get whatever cash they can to avoid default. On many counts this stress is already happening. For the more distressed company bonds the implied borrow rates are closing in on 20%! The total oil debt is converging on $1 trillion in North America and $2.5 trillion globally!!! What's more is that the borrow rate for the less leveraged companies have doubled over the last year to an average of 8%. Again, with decline rates of an average globally at 35% and for shale at 60% this model just doesn't work. Someone owns this debt, so that's maybe why the financial sector has been hit so very hard. If we get more defaults happen then the appetite for financing oil production will eventually drop. It's possible the news in the oil space will get much worse in the coming months. This will eventually be good news for oil supply. Uneconomic oil production will stop, premium oil deposits will move into stronger hands and we eventually get some upward momentum.