We're nearing the bottom in oil prices.
With the price of benchmark West Texas Intermediate crude oil down 56% from its mid-June high, it's now impossible for oil producers to earn profits on new shale oil production.
That means energy companies worldwide are starting to scale back on new drilling and are announcing job cuts. And a well-known Canadian energy-services company just filed for bankruptcy. Others will soon follow.
These are all signs the sector is nearing its "blown out and left for dead" bottom – the point when contrarian investors can step in and buy cheap, safe assets.
But it can't happen yet.
Let me explain...
On January 15, Canada's GASFRAC Energy Services, a company that helps energy producers frack wells, filed for bankruptcy.
The company's bankruptcy is noteworthy because it recently patented a technology that allows producers to drill a well without water. This is a big deal – the technology could save oil producers millions of dollars in the future. You see, drilling a well with hydraulic fracturing ("fracking") – which is common in shale areas – takes two to five million gallons of water.
But GASFRAC simply couldn't find enough customers. You can see how the industry downturn obliterated GASFRAC's share price over the last seven months.
And the company isn't alone in its struggles. A who's who of energy companies have recently announced cuts...
Oil-service provider Baker Hughes said it'll cut 7,000 jobs, most of them this quarter. Fellow oil-service company Schlumberger will cut 9,000 jobs. Oil producer Talisman Energy announced it will cut at least 10% of its workforce at its North Sea operations. BP, Shell, Chevron, and Conoco Phillips have all said they'll be cutting jobs, too.
Meanwhile, oil producer BHP Billiton said on Wednesday it's cutting 40% of its U.S. shale operations. It will reduce its rig count by the end of June.
But I assure you, this is just the beginning. More cuts and bankruptcies will follow.
You see, we haven't seen the bottom in oil prices yet.
Despite companies cutting back, the Energy Information Administration (EIA) says worldwide crude oil production is expected to exceed demand by 900,000 barrels per day during the first half of this year.
As long as supply outpaces demand, oil prices will continue falling... and oil companies will continue to struggle.
We'll likely see the oil supply decrease in the months ahead as more oil producers cut oil production. But until that happens, we won't see a bottom in oil prices.