Look Out Below :Oil prices hit 11-year low as global supply balloons ( Reuters plus Bloomberg charts) )

LONDON (Reuters) – Brent crude oil prices hit their lowest in more than 11 years on Monday, driven down by a relentless rise in global supply that looks set to outpace demand again next year.

Oil production is running close to record highs and, with more barrels poised to enter the market from nations such as Iran, the United States and Libya, the price of crude is set for its largest monthly percentage decline in seven years.

Brent futures (LCOc1) fell by as much as 2 percent to a low of $36.05 a barrel on Monday, their weakest since July 2004, and were down 49 cents at $36.39 by 1332 GMT.

While consumers have enjoyed lower fuel prices, the world’s richest oil exporters have been forced to revalue their currencies, sell off assets and even issue debt for the first time in years as they struggle to repair their finances.

OPEC, led by Saudi Arabia, will stick with its year-old policy of compensating for lower prices with higher production, and shows no signs of wavering, even though lower prices are painful to its poorer members.

The price of oil has halved over the past year, dealing a blow to economies of oil producers such as Nigeria, which faces its worst crisis in years, and Venezuela, which has been plunged into deep recession.

Even wealthy Gulf Arab states have been hit. Last week Saudi Arabia, Kuwait and Bahrain raised interest rates as they scrambled to protect their currencies.

NO LIGHT AT THE END OF THE TUNNEL

“With OPEC not in any mood to cut production … it does mean you are not going to get any rebalancing any time soon,” Energy Aspects chief oil analyst Amrita Sen said.

“Having said that, long term of course, the lower prices are today, the rebalancing will become even stronger and steeper, because of the capex (oil groups’ capital expenditure) cutbacks … but you’re not going to see that until end-2016.”

Reflecting the determination among the biggest producers to woo buyers at any cost, Russia now pumps oil at a post-Soviet high of more than 10 million barrels per day (bpd), while OPEC output is close to record levels above 31.5 million bpd.

Oil market liquidity usually evaporates ahead of the holiday period, meaning that intra-day price moves can become exaggerated.

On average, in the last 15 years, December is the month with least trading volume, which tends to be just 85 percent of that in May, the month which sees most volume change hands.

Brent crude prices have dropped by nearly 19 percent this month, their steepest fall since the collapse of failed U.S. bank Lehman Brothers in October 2008.

U.S. crude futures (CLc1) were down 26 cents at $34.47 a barrel, their lowest since 2009.

“Really, I wouldn’t like to be in the shoes of an oil exporter getting into 2016. It’s not exactly looking as if there is light at the end of the tunnel any time soon,” Saxo Bank senior manager Ole Hansen said.

Investment bank Goldman Sachs (GS.N) believes it could take a drop to as little as $20 a barrel for supply to adjust to demand.

Thanks to the shale revolution, the U.S. has been pumping a lot of oil on the cheap, helping to drive down prices to six-year lows and to fill up storage tanks. Indeed, we’re running out of places to put it.

LOOK OUT BELOW

The U.S. has 490 million barrels of oil in storage, enough to keep the country running smoothly for nearly a month, without any added oil production or imports. That inventory doesn’t include the government’s own Strategic Petroleum Reserve, to be used in the now highly unlikely event of an oil shortage. Nor does it include oil waiting at sea for higher prices. The lower 48 states also boast about 4 trillion cubic feet of natural gas in storage — a far bigger cushion than Americans have needed so far during a very warm winter.

For their part, OECD countries (including the U.S.) have nearly 3 billion barrels of oil in storage — or enough to keep factories lit and houses heated in those countries for two months, cumulatively, without added production or imports.

The glut is going to continue worldwide unless some major producers stop pumping. OPEC announced recently that it was abandoning output limits.

So what happens when there’s too much oil to store? Producers will try to rid themselves of it by cutting prices. In that scenario, the price would plummet so far that some producers would shutter their wells altogether — which is, perhaps, the only way that the oil glut will ease.

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The US Energy Sector on the Verge of a Cataclysmic Default

 

The U.S. E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the U.S. economy, according to Paul Merolli, a senior editor and correspondent for Energy Intelligence, an energy sector news and analysis aggregator. Merolli’s report calls out the over-leveraged, under-hedged U.S. E&P sector, which has been trying to keep up appearances over the past 12 months by slashing operating costs and capex to keep production costs lower than oil prices.

But experts believe that lower costs and improving efficiency won’t be enough for the sector as it grapples with some $200 billion-plus in high-yield debt, which the U.S. E&P sector used to finance the shale oil boom. According to Standard and Poor’s, there have already been 19 U.S. energy sector defaults so far in 2015, while another 15 companies have filed for bankruptcy. The default category also includes companies that have entered into “distressed exchanges” with their creditors.

Moreover, a Nov. 24 report from S&P Capital IQ titled “A Cautionary Climate” shows that the total assets and liabilities of U.S. energy companies filing for bankruptcy protection have grown in each quarter of 2015, and the third quarter was no exception with assets totaling more than $6.2 billion and liabilities totaling more than $8.9 billion. Each quarter of 2015 was larger than the total for all U.S. energy bankruptcies in 2014.

Also see: Oil Patch Bankruptcies Total $13.1 Billion So Far This Year

U.S. E&P Sector: Junk rating

According to Energy Intelligence, Standard & Poor’s applies ratings to around 100 E&P firms. Of these, 77% now have high-yield or “junk” ratings of BB+ or lower, 63% are rated B+ or worse, and 31% or 51 companies are rated below B-. Companies rated B- or below are effectively on life support, while those rated C+ are “maybe looking at a year, year-and-a-half before they default or file for bankruptcy,” according to Thomas Watters, managing director of S&P’s oil and gas ratings, speaking to Energy Intelligence.

High-yield E&Ps are expected to see negative free cash flow of $10 billion during 2016, even after all the recent capex cuts and efficiency measures. Unfortunately, capital markets are closing rapidly to new E&P debt issues. Last year, the U.S. E&P sector raised $29 billion from 44 issuances of public debt in 2014, but this year only $13 billion has been raised across 23 issuances, almost all of which occurred during the first half of the year.

What’s more, the U.S. E&P sector is woefully under-hedged. Energy Intelligence’s data shows that small producers have 27% of their oil production hedged at an average price of $77/bbl, mid-sized firms have 26% hedged at $69, and large producers have just 4% hedged at $63.

U.S. E&P sector: a final lifeline

It is believed that the U.S. E&P sector will really start to cave in April when banks are due to start their next review of borrowing bases. Borrowing bases are redeterminedevery six months, and banks use market oil prices to calculate the value of company oil reserves, which companies are then able to borrow against.

Haynes and Boone’s Borrowing Base Survey is predicting an average cut of 39% to borrowing bases when the next round of revaluations take place. In September, The Financial Times reported on a research note from Bank of America which pointed out that only a fifth of “higher-quality” energy companies had used up more than half of their borrowing base capacity. For junk-rated companies, however, it’s a different picture. Citi points out that only 21% of the junk-rated energy companies it covers have any borrowing base capacity left at all.

So with borrowing bases set to fall at the beginning of next year and capital market access drying up, it looks as if many oil companies are going to find their liquidity deteriorating significantly going forward. Another source of concern for E&Ps and their lenders are price-related impairments and asset write-downs which have already amounted to $70.1 billion so far this year, compared to the $94.3 billion total for the previous 10-year period of 2005-14. And there could be further write-downs on the horizon:

“Year-to-date, there has been $70.1 billion in asset write-downs in 2015, approaching the $94.3 billion total for the previous 10-year period of 2005-14, according to Stuart Glickman, head of S&P Capital’s oil equities research. And he expects even more write-downs and impairments to emerge at year-end. “Companies are putting this off for a long as they can. You don’t want to be negotiating in capital markets with a weakened hand,”

“Chesapeake Energy, one of the largest US independent producers, shocked earlier this month by indicating a $13 billion reduction in the so-called PV-10, or “present value,” of its oil and gas reserves to $7 billion. Had Chesapeake used 12-month futures strip prices — instead of Securities and Exchange Commission-mandated trailing 12-month prices for PV values — the value would’ve fallen to $4 billion.” — Source: Energy Intelligence, “Is Debt Bomb About to Blow Up US Shale?

This conclusion is also supported by research from S&P Capital IQ:

“Using data from SNL Financial, we looked at natural gas-focused companies across the value chain to see whether there is a relationship between their level of revolver usage and their forward multiples. Within this subset of companies, exploration and production (E&P) companies have the greatest usage of their revolving credit facilities — 57% on average, excluding those with either no revolving credit or no usage on their revolving credit lines. As of late September 2015, this sub-industry also had a forward EBITDA multiple of about 6.2x.” — Source: S&P Capital IQ, “A Cautionary Climate.”

E&P sector waiting for a bailout

All in all, it looks as if the U.S. E&P sector has a rough year ahead of it, but for strong companies with investment-grade credit ratings, next year could become an “M&A playland” according to Energy Intelligence. The six-largest integrated majors together hold a war chest of some $500 billion, and there’s a further $100 billion in private equity sitting on the sidelines.

Whatever happens, it looks as if the U.S. E&P sector is about to undergo a period of significant change.

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Oil Prices May Plunge : ‘Super Contango’

It looks to be a volatile final few weeks for crude oil prices. So far, the low for WTI oil prices (WTI) in 2015 of $37.75 a barrel set in August stands as the low price point — but not for long.

There is a global supply glut, not just of crude oil, but, increasingly, refined products that will likely break the back of price support in the market, sending oil prices into a holiday plunge. So much so, land based storage tanks are filling up and increasing numbers of volumes are being stored on tankers.

 

In a recent report, the International Energy Agency highlighted the fact that global inventories of all petroleum products were at 3 billion barrels, which was a record. And just over 2 billion of those barrels are resident here in the U.S.

Read More Contango explained

Each week, in the summary page of its petroleum-status report, the U.S. Energy Information Administration references the fact that U.S. crude-oil inventories are at levels not seen in over 80 years. Inventories of gasoline are well-above their average and diesel fuels are also well-supplied.

The vast crude oil glut or mega-glut is manifest in the West Texas Intermediate (WTXR) and Brent crude oil price curves, which have moved into a “super-contango.” (Yup, there are lots of superlatives needed to describe the current state of the market.)

Contango refers to when the front-month or near-term futures contract are trading less than or at a discount to longer-dated futures contracts.

The difference between Brent crude-oil contracts, one year apart, recently hit a record $8 a barrel. The January 2016 WTI futures contract is trading at a hefty discount of $1.50 per barrel to the February contract. In tightly-supplied markets, when crude oil prices are strong, that spread value is the complete opposite.

Oil prices have gotten some support this week from the heightened military action and worry over the situation in Syria and Northern Iraq , especially withthe downing of the Russian fighter jet by Turkey. How Russia responds could plunge the region into deeper turmoil, putting a great deal of oil infrastructure and supply in the cross hairs. But these fears simply do not haunt the market for very long last these days.

 

The market also got a taste of Saudi Arabia ‘s power this week, when a flip comment by the Saudi oil minister at a cabinet meeting was taken to signal a change in production policy by the Kingdom, as a way of “cooperating” with the other OPEC and non-OPEC producers. With the OPEC meeting looming next week, the comments were seized upon.

The reality is that nothing will come of the OPEC meeting. The Saudis are set to hold their ground. They see little to gain in assisting their oil market and regional rivals, Russia and Iran , by helping to “stabilize” the oil markets. In fact, the Saudis don’t see a market that needs stabilizing.

 

The lone bright spot for the oil market has been the strong demand for gasoline. The demand in October in the U.S. was the highest in eight years. But, once the holidays pass, that demand will drop off, too.

The downward pressure remains intense on the petroleum complex from the mega-glut and the hit to demand from the economic softness in China and Europe. The strengthening dollar is also a negative for prices.

U.S. motorists will be filled with glee this holiday season, as they buy sub-$2.00 per gallon gasoline, courtesy of $30 crude oil.

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

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$20 Oil If OPEC Doesn’t Act : Venezuela

  • Don’t Cry for Me Venezuela
  • It won’t be easy, you’ll think it strange
    When I try to explain how I feel
    That I still need your love after all that I’ve doneI had to let it happen, I had to change
    Couldn’t stay all my life down at heel
    Looking out of the window, staying out of the sun
  • OPEC member seeks `equilibrium price’ of $88 a barrel
  • Saudis, Qatar to consider proposal, Venezuelan minister says

Oil prices may drop to as low as the mid-$20s a barrel unless OPEC takes action to stabilize the market, Venezuelan Oil Minister Eulogio Del Pino said.

Venezuela is urging the Organization of Petroleum Exporting Countries to adopt an “equilibrium price” that covers the cost of new investment in production capacity, Del Pino told reporters Sunday in Tehran. Saudi Arabia and Qatar are considering his country’s proposal for an equilibrium price at $88 a barrel, he said.

OPEC ministers plan to meet on Dec. 4 to assess the producer group’s output policy amid a global supply glut that has pushed down crude prices by 44 percent in the last 12 months. OPEC supplies about 40 percent of the world’s production and has exceeded its official output ceiling of 30 million barrels a day for 17 months as it defends its share of the market. Benchmark Brent crude settled 48 cents higher at $44.66 a barrel in London on Friday.

“We cannot allow that the market continue controlling the price,” Del Pino said. “The principles of OPEC were to act on the price of the crude oil, and we need to go back to the principles of OPEC.”

OPEC ministers will meet informally on Dec. 3 in Vienna, a day before the group’s formal session, he said.

El Niño Could Turn Into Worst Nightmare For U.S Natural Gas Producers ( 10 % less demand this winter)

We have now tumbled into fall, although you wouldn’t know it by looking at the weather forecast. As NOAA’s 8-14 day outlook illustrates, we are set for above-normal conditions for the first week of October across, ooh, basically the entire US. This morning’s natural gas storage report is expected to yield an injection well above the 5-year average of 83 Bcf, and weather forecasts point to further solid injections in the weeks to come.

Last week we took a look at what an El Niño meant for the coming winter as WSI issued its winter weather outlook. WSI is predicting the strongest El Niño in 65 years, which ‘should drive warmer-than-normal temperatures across much of the northern U.S., as the polar jet stream weakens and lifts northward‘. Accordingly, WSI projects natural gas demand this winter to be 10% lower than the previous one.

With this in mind, and with storage levels already 16% higher than last year, and 4% higher than the five-year average, it provides some color as to why the January contract (aka the bleak mid-winter) is currently at a 16-year low.

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(Click to enlarge)

There is a somewhat more frosty reception being felt across financial markets today, with Japanese equities opening for the first day this week, and promptly getting walloped. This baton of risk aversion is being passed from continent to continent, as Europe sells off and the US looks down.

Crude prices were finding some solace in a rising euro earlier in the day, with the European Central Bank downplaying the need for further stimulus. But as the outlook gets bleaker for broader markets, risk aversion is dragging crude lower. On the economic data front, we had a weaker-than-expected manufacturing print from Japan (which further greased the wheels for an equity sell-off).

Onto Europe, and German business confidence was the opposite of its compatriot indicator, the ZEW, by showing a weak current assessment but improving expectations (the ZEW was the other way round). Onto the US, and durable goods were relatively in line across the board, while weekly jobless claims came in a little better than expected at 267,000, but slightly higher than last week.

Fears are escalating in the oil patch about an impending credit crunch amid falling investment. Oil producers are set to see credit lines cut by an average of nearly 40%, as the majority of companies see their credit lines shrink due to the revaluation of assets (a twice-yearly phenomenon). This comes at a time when upstream investment is also shrinking in response to lower oil prices. The below chart from EIA highlights that investment levels in the coming years will be significantly lowerthan the 10-year annual average, due to the drop in prices (the crude oil first purchase price is adjusted for inflation).

View gallery

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(Click to enlarge)

Finally, we discussed a couple of days ago how Singapore is seeing record stockpiles of fuel oil finding its way onto tankers amid exceptionally strong refining runs. We are seeing a similar tale emerge for diesel exports from China, as refiners keep on refining amid slower demand. According to the General Administration of Customs, diesel exports have risen 77% year-on-year to reach a record 175,000 barrels per day in August. Strong refining runs are endorsed by what we see in our#ClipperData, with Chinese oil imports year-to-date 14% higher than last year, rising to meet this ongoing demand.

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Natural Gas Drillers Can’t Catch a Break : Bloomberg News

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.

Drillers fled natural gas for oil and liquids as commodities collapsed.
Drillers fled natural gas for oil and liquids as commodities collapsed.

Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.

The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers' profits.
The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.
Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”

 

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Is SandRidge Energy Built to Last? By Investopedia

When SandRidge Energy (NYSE: SD) announced last month that it was raising $1.25 billion in new debt, the move came as a surprise. This is a company whose CEO readily admitted earlier this year that if the current oil price was the new normal that it would, “probably want to remove $1 billion of debt from the balance sheet.” However, instead of focusing on ways to do just that, the company went out and piled on even more debt. It’s a move that certainly begs the question of whether or not SandRidge Energy is building a company that will last.

Piled high and deep
No matter which way we slice it, SandRidge Energy is over its head in debt. After accounting for the recent debt issuance, SandRidge Energy now has roughly $4.6 billion in net debt outstanding. If we add in its equity market value and its preferred equity, the company’s total enterprise value sits at roughly $5.7 billion.

To put that into perspective, SandRidge Energy now has almost as much net debt as EOG Resources (NYSE: EOG), which is a company roughly 10 times its size, since EOG Resources has a $53 billion enterprise value. Another way to look at it, debt as a percentage of SandRidge Energy’s enterprise value is 81% while it’s only 9% of EOG Resources’ enterprise value.

SandRidge added the new debt as a stop gap measure to boost its liquidity and therefore buy it more time to deal with the situation. However, it’s a move that could be its undoing should oil prices stay weak for the next couple of years. That’s because the company needs higher oil prices to push its cash flow higher so that it can support its debt over the long term.

$60 oil is the new $80, but that’s not enough
One of the reasons SandRidge Energy wanted to buy itself some more time is because it’s working feverishly to get its well costs down to $2.4 million per lateral. That cost represents a 20% saving from last year’s well cost and, more important, would enable SandRidge Energy to earn a 50% internal rate of return at a $60 oil price. For perspective, that’s the same return the company had been earning at a $80 oil price when its well costs were over $3 million per lateral. The problem is the fact the company still has a ways to go as its current well costs are $2.7 million.

Furthermore, even if SandRidge can meet its lofty goal of a $2.4 million well cost, the returns it would earn would still be well below what other peers like EOG Resources are already earning. In fact, EOG Resources is actually enjoying better well economics right now than when oil prices were $95 per barrel. As an example, the company’s after tax rate of return is 73% for wells drilled in the western Eagle Ford Shale while the company’s wells in the Delaware Basin Leonard now earn a 71% after tax rate of return, which are above the previous returns of 60% and 36%, respectively.

Investor takeaway
SandRidge Energy’s mountain of debt alone suggests the company isn’t built to last as it has almost as much debt as EOG Resources, a company nearly 10 times its size. Its problems are further compounded by the fact that the company’s asset base simply can’t produce returns on the same level as EOG Resources. Clearly, the company faces a daunting task as it won’t survive unless the price of oil moves meaningfully higher so that it can better support its mountain of debt.

Read more: http://www.investopedia.com/stock-analysis/062215/sandridge-energy-built-last-sd-eog.aspx#ixzz3dsSG8k

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