The stressed-out oil industry faces an existential crisis amid ‘abyss of $27 oil’

The Saudis might have to go public, OPEC’s out of balance, the U.S. is suddenly a global exporter, and shale drillers are trying to find lifelines from investors as banks abandon them.

Oil rally fuelled by OPEC noise, just ‘bulls clutching at straws’

Citibank analysts had a succinct warning concerning the rally: Oil bulls are “clutching at straws,” i was told that.

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Welcome to oil’s ” new world ” order, full of stresses, strains and fractures. For leaders gathering in Houston next week in the IHS CERAWeek conference – often dubbed the Davos from the energy industry – a key real question is: what will break first? Will it be the total amount sheets of massive U.S. shale companies? The treasuries of Venezuela and Nigeria? The resolve of Saudi Arabia, whose recent deal with Russia to freeze output levels offered the first hint of a rethink?

After watching prices crash through floor after floor within the worst slump for any generation, the is looking forward to answers. Insiders say it’s not too hard to visualize what markets might look like after the storm – say 5 years down the line, when today’s cost-cutting creates a supply vacuum which will push up prices. But it’s what happens meanwhile that’s got them scratching their heads.

“This can be a weird thing for a market analyst to say because it’s usually the opposite case, however i have more conviction within my five-year outlook than my one-year outlook,” said Mike Wittner, head of oil researching the market for Societe Generale SA. “Maybe I’m letting my head get turned inverted by the last couple months.”

Seeking clarity at closed-door sessions, cocktail hours and water-coolers in Houston will be some of the industry’s biggest players, from Saudi Petroleum Minister Ali al-Naimi to Royal Dutch Shell Plc Ceo Ben Van Beurden.

In a less volatile year, the long-term viability of fossil fuels might have been at the top of their agenda after December’s breakthrough climate deal in Paris. But inside the industry, that debate has “fallen into the abyss of US$27 oil,” said Deborah Gordon, director from the Carnegie Endowment for International Peace’s energy and climate program.

“It appears as though it’s never a good time,” she said. “You can’t have these conversations when oil is US$125 because then you definitely can’t get it from the ground quickly enough. And you can’t have it at US$27 because you’re just attempting to survive.”

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Shale Boom

U.S. shale drillers were built with a key role in bringing prices that low, with the addition of 4 million barrels a day in under 4 years – similar to a new OPEC member materializing overnight. Natural gas has mirrored the pattern, with surging output and plunging prices.

Now the businesses are victims that belongs to them success. As much as 74 face significant difficulties in sustaining debt, according to Moody’s Investors Service. The effective yield of the Bank of America Merrill Lynch High-Yield Energy Index rose to more than 21 percent on Feb. 11, the most because it was made in 1997.

So far, shale bankruptcies have been restricted to smaller outfits like Magnum Hunter Resources Corp. and Swift Energy Inc. Some investors are involved that Chesapeake Energy Corp., the second-largest natural gas producer within the U.S., could be the first big fish from the water: its shares have plunged 90 percent previously year.

The one thing the strain on companies hasn’t done is destroy production. Engineers have found ways to lower costs and boost output at oil wells, allowing cash-starved drillers to keep enough rigs active to ensure that output continues to be within 5 per cent of last year’s high.

OPEC Output

Meanwhile, around the international scene, the Saudi-Russian accord announced Tuesday, to which Venezuela and Qatar have also signed up, would cap production at January’s levels – a record full of Russia’s case, and never far off for that Saudis. Iran isn’t a party to the plan, and its imminent go back to world markets could increase the glut. Historically no. 2 OPEC producer, the Islamic Republic is getting ready to ramp up exports after sanctions were lifted last month.

Brent crude didn’t sustain a rally after the plan was announced, suggesting that traders don’t see any alternation in the actual picture: Suddenly, there’s oil everywhere. Without a rebound in prices, the effects for governments – from Russia to Nigeria to Venezuela – range from grim to catastrophic.

You’ve got 1 / 2 of OPEC in existential crisis whether they can be viable governments at this point

Russia has a relatively diversified economy, but it’s still running the biggest deficit in five years, and selling assets to invest in a stimulus program. Nigeria, which depends upon oil for most of its exports, is battling to prevent a currency devaluation and pleading for development loans to exchange the missing petrodollars. Venezuela is a whole lot worse off, with debt defaults looming as well as an inflation rate estimated through the International Monetary Fund at 275 per cent.

“You’ve got half of OPEC in existential crisis whether they may be viable governments at this point,” said Allen Gilmer, ceo of energy consulting firm Drilling Info Inc. in Austin, Texas.

Saudi Arabia

As usual within an OPEC meltdown, all eyes have turned to Saudi Arabia, the world’s top exporter and architect of the cartel’s keep-pumping strategy as it seeks to protect market share.

While the Saudis have deeper pockets than most of their OPEC peers, they haven’t been immune from the price turmoil – particularly with wars in Yemen and Syria to finance. Reserves tumbled by about US$115 billion last year. Saudi rulers have slashed subsidies, announced new taxes and said they’re even considering selling shares in the state oil giant, Saudi Aramco.

“We don’t want a reduction in supply,” Al-Naimi said following the Russian deal. But he also said it had been just the “beginning of a procedure.”

The Saudi minister will address IHS CERAWeek’s main hall morning, in the week’s most eagerly anticipated event. A packed audience will be hoping he elaborates.

“There’s a brief fix, and a long fix,” said Andrew Lebow, a senior partner at Commodity Research Group. “Are we opting for rapid fix of the production cut, or the long-haul slog of rebalancing the marketplace? That’s what everyone at CERA will probably be talking about. And it’s all determined by the Saudis.”

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