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Phil Flynn

Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665

Oil prices are moving up on a wave of economic optimism, not to mention a very bullish American Petroleum Institute (API) report. The API posted a 7.8-million-barrel crude-draw led by a 1.4 million barrel drop in the Cushing, Oklahoma delivery point. Gasoline supply fell by a holiday driving inspired 776,000 barrels. Distillates increased by a comforting 2.8 million barrels as the new IMO rules are now in effect. Yet as we head into a new decade of trading, the big story this year may be peak shale.

We all know how shale has changed the world, yet 2020 is a year where shale may have to cut back to survive. For a long time now, we have been warning that the philosophy of losing money on every barrel of oil and trying to make up for it in volume was not a sound business strategy and now the shale industry has to come to terms with that fact. There are too many articles published that highlight these issues. Debt and low oil prices have hurt shale production and is therefore making investment dry up. Baker Hughes reported that U.S. rig counts have fallen for the first time since 2016.

The Wall Street Journal says that, “North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years and the bill is coming due for the shale industry’s price war with OPEC. The Journal says that, “it is unclear how they will repay it all. Shareholders and private-equity investors have been burned in recent years, attempting to buy at the bottom. Banks are in retreat. Bond markets have shown little indication that they are open to any but the oil patch’s most attractive borrowers. Analysts are predicting and investors are hoping that the specter of debt maturities will prompt companies to do what low commodity prices and prodding from shareholders haven’t stop drilling so many wells.”

The Wall Street Journal reported that companies with a combined debt of $171.2 billion filed for bankruptcy protection from the start of 2015 through September 2018, according to data from law firm Haynes and Boone LLP. In that same time, more than $250 billion of debt was issued to oil-and-gas companies, according to Moody’s.

Reuters also weighs in on the shale crisis. They write, “Vastly slower U.S. oil growth this year and the prospect of a plateau for the world’s top oil producer has signaled a new and unfamiliar era of self-restraint for the go-go shale industry. Spending cuts and production declines common to shale wells mean U.S. output growth is expected to break from 2019’s pace that pushed domestic production past 13 million barrels per day (bpd). Some analyst forecasts for next year call for growth to slow, potentially to a rate of just 100,000 new bpd.” It might be even less than that. Producer reports of underperforming shale wells could mean that U.S. oil output may fall in 2020. While that may sound like a bad thing, it will allow oil prices to rise and allow strong oil and gas firms to survive as opposed to going bankrupt.

That sets the stage for a bullish 2020 for oil. Oil today is getting a boost not only from API data but progress on China trade deals along with more stimulus in the Chinese economy. China said they will inject 115 billion into the economy, only moving to raise global oil demand expectations.

Because of the New Year holiday, we will get the Energy Information Administration (EIA) “Petroleum Status Report” as well as the natural gas storage report on Friday.

Bloomberg reports that Russia’s crude oil and condensate output hit a post-Soviet high last year of 11.9 million barrels a day, even as it curbed production under an agreement with OPEC. Bloomberg continues, “The 11th consecutive year of output growth underscores the reality of Russia’s cooperation with the Organization of Petroleum Exporting Countries. Despite being one of the architects of the original 2016 deal, Moscow has a poor record of fulfilling its pledged production cuts and has come under pressure from its allies to do better.”
Thanks,
Phil Flynn

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