Variables that may change the 2020 oil markets

on Nov 26, 2019
Updated: Mar 11, 2020
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  • Several forecasters predict an oil surplus in 2020 leading to lower prices
  • Banks have been sidelining shale drillers causing financial stress
  • If something isn’t done about it, experts believe that the ongoing financial stress may hurt the oil market in 2020

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According to several forecasts, there’s likely going to be an
oil
surplus
in 2020. But most of the outlooks are only based on the shale
growth of the US next year, an assumption that may be unrealistic.

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The dominoes keep falling but financial restraints are well-known.

In its recent report, Bloomberg
stated
that a couple of drillers are struggling to attract new capital because
financial institutions are reducing their credit lines.

Banks reevaluate the creditworthiness of shale drillers
bi-annually and outline each company’s credit line; however, for the first time
in three years, lenders will be tightening the firms’ requirements to borrow
money.

The review of lending terms by banks comes at a time when shale
finances’ scrutiny is on the rise, and investors have been losing interest too,
causing a sharp drop in the stocks.

Stakeholders have remained skeptical about the industry even
as more cash
continues to be burnt
; and if firms continue being faced with the ongoing
cash crunch, bankruptcy may be inevitable.

Billy Bailey, Saltstone Capital Management LLC portfolio
manager, told Bloomberg that the decision to tighten borrowing terms “can be a
good precursor to potential bankruptcy because as capital markets stay closed
off for these companies, the borrowing base serves as the only source of liquidity.”

Nevertheless, some companies are not cut off from borrowing;
Diamondback Energy managed to issue $3 billion low-interest bonds clearly
separating the “big fish from the small ones” in the sector.

The financial setbacks seem to be responsible for this year’s
reported slowdown of US oil production. The country is reported to have added
about 2 million barrels per day last year, but in 2019, the output had increased
by a few hundred thousand by August.

Ironically, the IEAA is still projecting an annual increment
of 1.2 million barrels per day for the US in 2020, sparking fierce
debate
among stakeholders.

If the financial woes continue, the oil sector could
struggle for the better part of 2020.

This is why OPEC+ must jump in fast and forge a way
forward. The IEA, however, believes that OPEC+ may soon find itself between a
rock and a hard place with the looming supply glut due to shale growth. Other
stakeholders are equally concerned, with Commerzbank saying OPEC’s plan to
focus on “stragglers” like Nigeria and Iraq may not be enough.

In a statement, the bank stated: “It is a mystery why OPEC should
believe that it can avoid this oversupply by making just a few cosmetic
adjustments. By early next year at the latest OPEC thus risks being rudely
awakened.”

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