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.
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.”