Oil market downturn turns heat on US shale producers

The downturn in the oil market is beginning to impact those who had a fair share in keeping it oversupplied and prices suppressed. The US shale oil producers are beginning to feel the pain of lower oil prices with large-scale increase in bankruptcies.

A few shale companies in the US had already gone bankrupt, with the possibility of a few more on the way.

According to a report by Motilal Oswal Institutional Equities, the total number of E&P (exploration and production) bankruptcies has risen to 20 so far, with the latest victim being Chesapeake Energy, one of the pioneers of the US shale industry, with a total debt of $9 billion.

It expected that the lower prevailing oil prices would result in write-down of $300 billion of global E&P assets.

This is significant considering that exploration had just started to pick up a couple of years back and was expected to peak anytime now. But COVID-19 induced lockdown and prevailing economic slowdown have turned the tables on the sector.

The US rig count has fallen to a record low of 278 units in the week ended June 26, 2020 (decline of 65% since Mar 2020 and 72% YoY), even as oil prices rebounded from historic lows in April, as some producers restarted production.

As per Baker Hughes data, the worldwide rig count has declined 52% YoY to 1,073 units (v/s 2,221 units in Jun'19).

According to a Platts Analytics Spotlight report, rigs are expected to stay relatively flat until early-2021 as operators are expected to wait several months for higher oil prices before starting to gradually increase rig count.

On the oil price front, the market is expected to remain flat, giving no immediately relief to oil producers from facing bankruptcies. According to the brokerage estimates, Brent would stabilize between USD40-50/bbl and settle at USD50-60/bbl in the longer run.

This is unlikely to give any respite to US Shale producers that need oil prices to be well above $50 a barrel to remain in business.

On the supply side, production cuts, both intentional (OPEC++) and unintentional (due to poor economies/bankruptcies), appear to be putting upward pressure on oil prices but global lockdowns on account of COVID-19 has led to huge demand destruction, which is keeping oil prices low.

On the domestic front, upstream oil companies such as ONGC have not seen a fall in demand for oil but gas off takes has fallen by about 9 per cent. The upstream companies in India will too face pressure when oil prices remain low, but with stagnant oil production and rising share of gas, the companies are expected to weather the current storm and emerge stronger..