Oil prices are rebounding after a reported drawdown in crude oil inventory and a cut in the dividend by Kinder Morgan that is signaling yet again that energy companies can’t take much more pain.
Kinder Morgan Inc (N:KMI), the company that was supposed to be immune to falling energy prices, had to cut its full-year dividend by a whopping 74 percent and that came just after they had said they were raising it. Yet that was not meant to be after the company made a purchase of a natural gas pipeline company and was downgraded by Moody’s. This company was one of the first Master Limited Partnerships that passed most of its profits to the investors to offset tax revenue. Yet even though they abandoned that strategy, the company is carrying a big load of debt. Yet the real story is this a company that is mainly a transportation company and is not immune to the pain that we are seeing in the oil price crash and that means other companies with debt will be at risk.
Oil producers are also at risk and this raises questions about future U.S. output. Many U.S. shale producers are buried in debt and energy companies are getting crushed which means production will fall.
The EIA reported that crude output will fall but not as much as previously forecast. Bloomberg News reports that Energy Information Administration trimmed its U.S. crude production outlook for next year. The agency decreased its 2016 forecast by 0.1 percent to 8.76 million barrels a day, according to its monthly Short-Term Energy Outlook. It boosted its estimate for this year to 9.33 million barrels a day from the 9.29 million predicted last month.
Bloomberg reports that America’s oil drillers have sidelined more than half the country’s rigs since October as prices have tumbled. The number of active oil rigs in the U.S. fell by 10 to 545 last week, the least in more than five years, according to data compiled by Baker Hughes (N:BHI) Inc. The drop in rigs is having a major impact on overall production output and is increasing at offshore fields, according to the EIA. "While U.S. monthly onshore production is expected to continue declining through most of the year, output in the Gulf of Mexico is on track to steadily rise," EIA Administrator Adam Sieminski said in an e-mailed statement. "Energy companies have cut back on their onshore oil exploration and drilling activities in response to low crude prices, but oil production in the Gulf of Mexico is less sensitive to short-term movements in the crude price." Twelve projects are scheduled to come online in the Gulf of Mexico in 2015 and 2016, pushing production up from 1.4 million barrels a day in the fourth quarter of 2014 to 1.7 million in the fourth quarter of 2016, according to the report.
Yet is that report optimistic in the aftermath of the recent price collapse. I think the pain of the recent drop will have broader consequences and hence reduce U.S. output a lot more that many expect.
The API reported that crude supply fell by 1.9 million barrels but a big build of 5.6 million barrels of distillates which includes heating oil. There will be no demand while temperatures soar in December. Which means you may be only able to dream of a White Christmas. Your Christmas present this year could be no snow and gas prices under $2.00 a gallon.