Pro: U.S. Shale will see more bankruptcies this year

Pro: U.S. Shale will see more bankruptcies this year
  • Oil prices rebounded sharply to north of $30 from negative territory.
  • Sub-zero oil prices implied oil has no where to go but up, according to one pro.
  • But oil prices are still shy of what is needed to sustain U.S. shale players.

Oil prices have rebounded north of $30 per barrel but the commodity is still deep in the red as WTI crude is down 30% over the past three months and Brent Crude is down more than 32% over the same time period.

Oil rebounded from negative territory

It wasn’t too long ago that WTI oil was trading in negative territory and when a seller of oil is paying someone to take it off their hands, it shouldn’t surprise investors when oil has “no other place to go but up,” The Schork Report editor Stephen Schork said on CNBC’s “Capital Connection.” 

The argument can be made that the cure for low oil prices is low prices which are resulting in a gradual rebalancing back towards equilibrium, he said. However, the price of oil is still way below the value U.S. producers need to keep their rigs open.

Meanwhile, the global oil industry experienced a $400 billion decrease in investment which will result in cuts to production and the ability of companies to bring oil to the market. While the “demand destruction” component is still outpacing the “supply destruction” side of the equation, the removal of half a trillion dollars from the market implies a set up for “firmness in the market as supply begins to fall into equilibrium with the rapid fall in demand.”

Shale: ‘further trouble through the end of the year’

The U.S. shale market needs oil to rebound back to January levels at around $50 to $55 per barrel to survive, he said. This figure is also consistent with international peers, including Mexico’s state oil company Pemex who hedged its entire production for 2020 at $49 a barrel.

The “absolute minimum” price of oil to keep current rigs active is $23 to $30 per barrel which is roughly in line with current prices, Schork said. 

“So what does this mean for shale?” he asked. “It means further trouble through the end of the year, increased bankruptcies and increased consolidation as we look towards the end of this year.”

Update: Oil prices down 4%

Oil prices were lower by more than 4% Wednesday afternoon amid reports Russia is looking to ease up on its supply cuts in July. This would be consistent with the previously announced OPEC+ deal which called for a combined production cut of nearly 10 million barrels per day.

Some members in the group were hoping for an extension of the cuts beyond July but Russia appears to be making it clear this is not its position.

By Jayson Derrick
Jayson Derrick has been writing professionally about stocks since 2011. He is particularly interested in alternative investments, hedge funds, and activist investing. He is a big fan of NHL hockey and lives in Montreal, Canada with his wife and four year old daughter.
Invezz uses cookies to provide you with a great user experience. By using Invezz, you accept our privacy policy.