The slumping crude price is putting new pressure on North American oil producers to further slash capital spending to reflect depressed revenues, as analysts paint a bleak picture of coming distressed asset sales and looming bankruptcies.
After a brief rally fuelled recently by a slumping U.S. dollar and speculation about a potential OPEC agreement, the key American benchmark oil price fell back below $30 (U.S.) on Monday. Traders refocused on the dismal fundamentals of oversupply and Saudi Arabia's clear signal on the weekend that there is no immediate prospect of a production-cutting deal.
On the New York futures market, West Texas intermediate (WTI) fell $1.20 – or nearly 4 per cent – to $29.69 a barrel. Prices had rebounded briefly from 12-year lows below $27 in mid-January, but analysts now see little evidence to suggest a rally can be reignited. The global benchmark, Brent, was down $1.18 to $33.88 a barrel.
Saudi Arabia's oil minister, Ali al-Naimi, met his Venezuelan counterpart, Eulogio del Pino, on Sunday as the South American sought support for an emergency meeting and a production-cutting deal among members of the Organization of Petroleum Exporting Countries and non-OPEC producers such as Russia. While the Saudi news agency described the meeting as "productive," there was no sign of agreement on a meeting.
"It's pretty clear that Saudi Arabia means to stand by their policy to maintain market share," Gene McGillian, analyst at Tradition Energy in Stamford, Conn., said in an interview. "And there is very robust production still in North America."
Morgan Stanley warned on Monday that a global supply overhang was unlikely to start clearing before 2017. "We see limited upside for Brent pricing over the next 12 months as the supply overhang is worked off," the bank said.
Analysts at Calgary-based FirstEnergy Capital dramatically reduced their forecast for the price of WTI over the next two years, to $37.25 a barrel for the 2016 average and $55 in 2017, down by $10 to $15 a barrel from their previous outlook.
"There's going to be a lot more squeeze placed on the sector than a lot of people were thinking just two months ago," FirstEnergy vice-president Martin King said Monday. "I don't think 2016 was imagined to be starting up with [oil] prices in the low 30s. … It's been pretty painful to watch."
He expects many producers will announce additional spending cuts when they reveal their fourth-quarter earnings in the coming weeks. Prices could fall further over the short term and that would prompt more companies to cut actual production by extending maintenance schedules in the oil sands, or reducing the number of wells into which they inject steam for extraction.
While some Canadian producers are facing debt walls, over all the companies have stronger balance sheets than their American counterparts, who piled up heavy debt to finance expansion when the shale oil boom was still hot just 18 months ago.
At current crude prices, U.S. producers would spend roughly twice their cash flow over 2016, according to IHS Inc., a U.S.-based consultancy. The 44 independent producers surveyed are currently targeting capital spending of more than $78-billion (U.S.), down 23 per cent from last year's level. But to maintain spending-to-cash-flow ratio in the traditional range, the companies would have to cut by a further $24-billion, or 30 per cent.
Overspending by those firms "will be problematic since they already have highly leveraged balance sheets and cannot afford further balance sheet deterioration," IHS analyst Paul O'Donnell said. "The result could be forced asset sales at bargain prices, sizable staff layoffs and, in the worst cases, bankruptcies."
Mr. O'Donnell said formerly high-flying shale oil producers are now retrenching dramatically by slashing dividends, laying off staff and cutting capital spending.
Rating agencies have downgraded the debt of many independent oil companies, with many now essentially having junk-bond status.
Chesapeake Corp. – once the leader in the shale gas boom – denied Monday that it was considering filing for bankruptcy protection but confirmed it was working with a law firm noted for restructuring work to "strengthen its balance sheet."