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    In this Jan. 14, 2015 file photo, some of the 60 rigs that are drilling surrounding McKenzie County, 40 percent of the rigs statewide, work in western North Dakota

    Bloomberg Issues Dire Forecasts for US Shale Oil Industry by 2017

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    Bloomberg predicts that the US shale oil industry is facing dire forecasts, especially for 2017, largely due to the cooler attitude among banks and investors toward the oil industry’s shrinking investments; in its turn, this will lead to a drop in production and another “harrowing year for the US producers”.

    “According to the consultancy Wood Mackenzie, about a third of oil production in the US states, not including Alaska and Hawaii, comes from companies that have borrowed against their oil and gas reserves and that face redeterminations of their borrowing base,” Bloomberg says.

    However the forecasts for the October redeterminations (banks recalculate the value of reserves for their oil company clients twice a year, in the spring and in the fall) are quite dire.

    According to survey conducted by the law firm Haynes and Boone, the forecasts predict a 39 percent decrease in the oil companies' borrowing ability, with 79 percent of borrowers expecting a decrease.

    While this is relevant to small producers that can only borrow against their reserves, Bloomberg says, bigger ones will also be hurt by banks' and investors' cooler attitude toward the oil industry.

    In the second quarter of 2015, 83 percent of US onshore oil producers' operating cash flow was used for servicing debt, according to the US Energy Information Administration — about twice the level of early 2012.

    This is not a sustainable business model, Bloomberg says. The oil companies can keep up their borrowing only if investors believe prices will rise significantly; that's not the case.

    December 2016 futures contracts for Brent crude sell for $56 per barrel, about $6 higher than the current price. This makes hedging by selling contracts such as this one rather unattractive, though oil firms still do it to retain their borrowing ability.  Wood Mackenzie estimates that the 26 biggest independent oil producers' cash flow from hedging will shrink to $2.2 billion next year from $9.1 billion in 2015.

    OPEC expects US oil production to drop by 100,000 barrels per day after explosive growth in 2014 and a slight increase this year (recent losses haven't completely wiped out the strong growth in the first six months of 2015).

    That's not a huge decline. Yet OPEC countries, especially Saudi Arabia, will expand their market share by more than that because demand is projected to increase by 1.25 million barrels per day.

    At current prices, demand is growing everywhere because cars, trucks and planes are cheaper to use, says the market report of the International Energy Agency.

    However, Bloomberg says, the Saudis will cover the increase.

    “This means another harrowing year for everyone, but especially for the US producers.”

    Related:

    Oil Prices Below $30 to Trigger Bankruptcies of US Shale Companies
    Saudi Determined to Crash Oil Prices Until US Shale Breathes Its Last
    Weaker US Shale Drilling Companies to Bankrupt Amid Oil Prices Drop
    Tags:
    producers, forecast, shale oil, United States, Saudi Arabia
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