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U.S. Oil Industry In Trouble, But Production Unlikely To Plunge Anytime Soon

Published 04/02/2020, 05:13 AM
Updated 07/09/2023, 06:31 AM

As expected, the news from U.S. oil producers is concerning. The former secretary of energy and former governor of Texas Rick Perry said on Fox News that "we are on the verge of a massive collapse of an industry that we worked awfully hard over the course of the last three or four years to build."

Whiting Petroleum (NYSE:WLL), one of the largest producers in the Bakken shale region in North Dakota, filed for bankruptcy on Wednesday, April 1. On the same day, Callon Petroleum (NYSE:CPE), an independent producer based out of Houston is hiring advisors to restructure its debt.

We knew U.S. oil producers would struggle tremendously with low oil prices and should expect more bad news like this on a regular basis. But that doesn’t mean U.S. oil production will plunge immediately.

WTI Futures Monthly Chart

Last Time Price Plummeted...

Look at what happened from 2014-2016, the last time U.S. producers faced a significant price drop. At that time, U.S. production peaked in April 2015. Production didn’t hit its nadir until September 2016.

The situation today is not exactly the same though. During March 2020, oil prices fell much more precipitously—30% in one day. However, what happened five years ago reminds us that U.S. producers will continue to pump even when they are losing money on each barrel. That's because they need revenue.

Furthermore, some U.S. producers have hedged, so they have contracts that pay over $50 per barrel, meaning they can keep pumping and receive more revenue. Enervus estimates that about 2.5 million bpd are hedged in this way.

Production will almost certainly drop, especially as assets and entire companies are sold to better-positioned firms that don’t need the revenue immediately. In some cases, wells may be abandoned. Oil in the U.S. has always been a boom-bust industry, and in the past we have seen producers just walk away.

Bankruptcy May Not Stop Output

It is vital for traders to understand what it means when a producer like Whiting files for bankruptcy. If a company in the United States can no longer pay its debts to its creditors, it can file for bankruptcy. With the help of the court, the company and the debt holders will reorganize what it owes. Some debt will likely be discharged. In the end, Whiting may emerge from the process significantly stronger.

Bankruptcy doesn’t mean that Whiting will halt or decrease production. Whiting may need to leave oil in the ground as an asset for sale, but it is also quite possible that part of the bankruptcy process will require Whiting to keep pumping so that it can pay its bills.

For now, there are reports that Whiting will continue to operate as before. So, when you read that a shale firm has filed for bankruptcy, you should understand that it is a sign of strain, but it is not necessarily a signal that production will decrease in the near future. In fact, it may indicate that production will not drop, at least for a while.

Yesterday’s EIA report on U.S. crude production ending the week of March 27 showed the U.S. was still producing 13.834 million bpd. There is no doubt that the U.S. oil industry is in trouble. However, as with individual companies, production from the industry at large is not expected to fall off a cliff tomorrow.

What’s Ahead?

On Friday, President Trump is scheduled to meet with the heads of various large American energy companies including ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Occidental (NYSE:OXY), Devon Energy (NYSE:DVN), Energy Transfer (NYSE:ET), Phillips 66 (NYSE:PSX) and Continental Resources (NYSE:CLR).

No one knows if any policy designed to buoy the U.S. energy industry will result from the meeting, but it’s important to remember that these are all large American companies and their interests are often contrary to the smaller oil producing companies facing financial distress now.

Ideally, the U.S. government would prefer high American production and low oil prices for refiners and consumers, but that’s not a possibility. Which means we'll have to wait and see what happens next.

Latest comments

is time to sell
Note that the US, for all its rhetoric from the president, still received 368,000 bpd from Saudi Arabia.  Of course, much of that may have been in transit or ordered before the Saudis made their decision to destroy the oil market.  It will be interesting to see how much it imports this next week,  That may be a topic at the Friday meeting, what'cha think?  Would President Trump sanction S.A.?
Not much use pumping oil if there is no place to put it.  While US imports were negative (as of 27 March), it was only by 200,000 bpd - less than 2% of production and refinery runs decreased by the same amount, negating that outflow.  What is the current filled capacity and the percentage available?  I'm fairly certain storage capacity is pretty close to topping the brim especially since the refineries have cut production.  (Note all statistics as of the last DOE/EIA report of 27 March.)
One of the best tactics for getting re-elected is to keep oil prices below the average of the previous 12 months. Prices will stay down till winter and probably beyond.
piss on the oil companies crying broke no money what did they do with the billions a month they were taking in when it was good times. paying ridiculous wages to CEO's and avoiding taxes I'm sure. while the American people pay hefty at the pumps for Thier greed. let them fail and feel what's it like to be an American working class
find it hard to believe with their reported profits...
Oil symbol in webbull?
oil symbols are listed by each company mentioned in blue on my screen most are all 3 charactors
Bad timing
oh thanks
Ok
As soon as this pandemic is over oil will be heading towards $50+ easy. Shorts are greedy and will lose their shirts. Oh well.
Nice article. Thanks
Once these guys stop pumping it's going to take $150/bbl to get them to fire up rigs again.  It's going to be a "Once bitten twice shy" scenario.
why $150/bbl??
150 because when smaller producers go bunkrupt and larger ones cut production, the supply falls and the price jumps...look at history of oil for the last 80 years...😜
oil price .will go up or down.?
Down
Thank you.
That's true América prefers low oíl prices for the industry, refiners and consumers
agree
Thank you
👍🏼
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