Crude climbs, but ills remain
U.S. crude climbed 9 percent on Friday, but analysts doubted a major market turnaround is underway, particularly amid lingering fears over global oil demand and an oversupply that will only fade if crude prices remain low.
Goldman Sachs believes crude prices will stay locked between $20 and $40 a barrel even after the midway point of 2016 as low prices force a global crude oversupply to decline. But without the Organization of the Petroleum Exporting Countries intervening in the market, it will almost certainly be a volatile period.
“There is no price floor. There is no price ceiling. There’s no reason to think prices will be stable on the upside or the downside,” said James Burkhard, head of oil market research for
consultancy IHS Energy. “We’re witnessing the repercussions of a world without OPEC as we knew it.”
U.S. crude rose $2.66 to $32.19 a barrel on the New York Mercantile Exchange, a 21 percent increase from the 12-year low reached earlier this week as colder weather boosting demand for oil products and investors cashed out bearish bets on oil. In part, the increase was because the February contract expired on Wednesday.
Global benchmark Brent rose $2.93 to $32.18 a barrel on the ICE Futures Europe. Exxon Mobil Corp. shares increased 3.3 percent, and Chevron Corp. shares rose 3 percent on the New York Stock Exchange.
But the bounce came amid new warning signs for the U.S. oil industry, as Moody’s Investors Service cut its 2016 forecast for both U.S. and international oil prices to $33 a barrel and put 120 oil and gas companies and their subsidiaries on review for downgrades. Sixty-nine of the entities are based in the United States.
Moody’s said crude prices may recover much more slowly than oil companies expect, or fall further. And even under a modest recovery, the credit ratings agency said, “producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows.”
Several i nvestment banks and similar advisory firms expect a wave of corporate restructurings and Chapter 11 bankruptcy filings in the oil patch this year as it becomes unprofitable to drill new wells to replace declining crude production.
“You’re going to see more bankruptcies now that folks are feeling a persistent downturn, a persistent heat,” said Scott Cockerham, a Houstonbased managing director at Conway MacKenzie Capital Advisors, which specializes in restructurings.
Last year, the oil companies that went bankrupt couldn’t survive with low crude prices because they were small, they had poor capital structure, high levels of debt and onerous capital costs. Now, healthier companies able to ride out the downturn by hedging future production at higher prices are in danger, as hedges roll off and as their finances worsen because they’ve pumped cheap crude for more than a year.
“We are seeing a lot more distress,” Cockerham said. “And they’re larger and larger companies.”
Meanwhile, the CEO of the world’s biggest oil field services company on Friday warned that the downturn is forcing oil producers to cut deep into spending levels that are already low.
“The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain,” Schlumberger CEO Paal Kibsgaard told investors.
Schlumberger t his week announced it cut 10,000 jobs in the fourth quarter, although Kibsgaard said he’s hopeful that’s the last wave of job cuts the company will need to make to prepare for an arduous 2016.
Schlumberger, considered a bellwether of the oil field services industry, lost nearly $ 1 billion in net income in the OctoberDecember period. Kibsgaard said this year will be “very challenging” but the industry could start to recover in 2017.
“A lot of the low-hanging fruit we have already picked,” he said. “We are now getting into the deeper part of the transformation.”
This week, U.S. oil companies sidelined five rigs that had been drilling for oil, bringing the number of active oil rigs down to 510, down more than 68 percent from its peak in October 2014. Each rig is associated with slightly fewer than 100 jobs, according to Wood Mackenzie.
Oil companies will almost certainly keep shutting down rigs in coming months, but the industry analysts are more focused on the slope of an eventually recovery than a floor for oil prices, said Bill Herbert, an analyst at energy investment bank Simmons & Company International in Houston.
A “slow and labored” recovery could carry a lot of pain into 2017, particularly if oil fails to rebound to $50 a barrel by the end of the year, he said.
“That’s not going to be sufficient for this industry,” Herbert said.
In a research note Friday, Goldman Sachs said easing the global oversupply of crude will likely “be both protracted and arduous.” As crude prices dropped into the high $20 range earlier this week, the oil market began telegraphing signs that the oil system had trouble sparing any room for more oil.
“There’s an incredible lack of storage space,” said John Kilduff, an oil market analyst and partner at Again Capital. “Say you’re a seller trying to get out of the final contract you may be holding. It’s a buyer’s market. They’ll take it off your hands, but they’ll want a substantial discount.”
Goldman said wellhead prices — the prices oil companies can get selling crude minus transportation costs — dropped below $10 a barrel for several grades of crude across the nation, with one refiner posting $1.50 a barrel for heavy-sulfur crude from North Dakota.
It was “an indication that these barrels, particularly the sour barrels that are infrastructure captive, are struggling to find homes and will likely need to be shut in soon once all options are exhausted,” Goldman analysts wrote.