The US oil industry is facing a tough challenge in the ongoing leap year. The COVID-19 pandemic is mainly to blame for both low demand and energy prices. Experts suggest three ways to exit the crisis in the US energy industry.
According to the Federal Reserve Bank of Dallas, American shale companies have to slash oil output and lay off a large number of employees. Nevertheless, despite the crisis, lots of energy companies are planning to increase output rates.
In its recent survey, the Federal Reserve Bank of Dallas found out that oil producers have revised priorities for the medium term compared to their stance in 2018. The majority of the polled industry managers stated the intention of keeping oil output at the current rates at any cost despite a crater in energy demand and a collapse of oil prices. Some leaders of shale companies (16%) are ready to reduce both leveraged funds and current operational expenses to improve their financial performance. Roughly the same share of oil producers pointed out their intention of expanding drilling output. From their viewpoint, neither a high debt burden nor extra loans would be an obstacle to such ambitions.
The lion’s share of the respondents (43%) think that the best cure for the ailing oil industry is a rise of the benchmark North American grade price to $51-$55 a barrel. A soon as WTI prices surpass the threshold mark of $50 a barrel, this will set the oil market in motion. Oil analysts reckon that smaller shale companies are crippled by the current WTI price level which is not higher than $38 a barrel. Their net earnings cover neither operating expenses nor capital ones. Importantly, capital expenses are essential to maintain drilling operations as drilling rigs sharply exhaust their capacity in the course of time.
So, production rates of shale rigs drop as steep as 70% in the first year of their operation. To cover such expenses, most shale companies have to borrow funds. However, banks are unwilling to provide heavily indebted drillers with loans. A slew of shale producers have got stuck in a vicious circle. They are not able to keep their business afloat without leveraged funds, but banks refuse to give credits. As a result, a great deal of American shale companies is on the verge of bankruptcy. No wonder, oil output in the US has tanked this year.
Analysts at Rystad Energy, an independent energy research and business intelligence company, echoed the survey by the Federal Reserve Bank of Dallas. Experts at Rystad Energy also warn that WTI prices above $40 a barrel will hardly revive the US oil industry. The Federal Reserve Bank of Dallas says that the presidential election is the culprit of the havoc in the domestic economy that also casts a shadow over the oil industry. Shale producers are braced for the worst in case Democratic presidential nominee Joe Biden wins the election. Shale companies’ leaders think that his policy would be more adverse for the industry than OPEC. During the presidential campaign, Joe Biden reiterated that he would impose a ban on fracking operations that are the essence of shale oil extracting.
Experts share the viewpoint that the ongoing oil crisis is much harder than the previous ones. Only large vertically integrated companies will be able to survive the crisis with modest losses. Such companies have access to different capital sources. Nevertheless, analysts underscore that even oil giants are in dire straits nowadays. Amid a slump in global oil prices, a lot of oil firms in the US are filing for bankruptcy. Unfortunately, the worst is yet to come.
