40% of Oil Producers Will Go Bankrupt if $30 Persists

Mish

Based on forward charts at least 40% of US oil producers are headed for bankruptcy.

Inquiring minds are diving into the Kansas City Fed Energy Survey by Chad Wilkerson, to get a better grip on problems facing oil producers. The results are grim.

“District energy activity fell sharply during the first quarter of 2020, with our index dropping to its  lowest level since we began the survey in early 2014,” said Wilkerson. “Expectations for future activity also fell to their lowest level since late 2014, as most firms do not expect energy prices to return to profitable levels this year.”

WTI Survey Price Expectations

Kansas City Fed Energy Survey - Price Expectations 2020-04-21
  • 6 Months: $33
  • 1 Year: $42
  • 2 Years: $50
  • 5 Years: $58

Solvency

Kansas City Fed Energy Survey - Solvency Expectations 2020-04-21

61 percent of firms would  remain solvent in the next year if the WTI price of oil would stay at $30 per barrel, and 64 percent of firms would remain solvent if the WTI price of oil would stay at $40. 

Forward Prices

WTI Oil Futures Through March 2021 2020-04-21

Price data in the above table from MarketWatch.

If those prices hold, the survey estimates about 39% of the oil producers will go bankrupt.

Even at $40, 36% of the firms would go bankrupt.

Oil Crash Resumes: When Does It Stop?

Earlier today I asked Oil Crash Resumes: When Does It Stop?

When Does the Crash Stop?

  1. When producers stop drilling oil that is not needed.
  2. When the speculators putting on "paper oil" trades get wiped out.

Paper Oil

Oil is another example of leveraged trades. Even more so than gold, speculators will not take delivery. 

There were net 554,489 speculative "paper" contracts in play as of a week ago.

Gain or Losses Per $10 Price Move

Gains or Losses on $10 Move in Crude 2020-04-21

These speculators just took a massive hit. They cannot and never intended to take delivery of oil. 

Trump Wants to Form a Plan

My Plan

  • Stop the bailouts.
  • Let the oil speculators go bankrupt.
  • Let the financers take it on the chin as well.

When Does the Crash Stop?

  1. When producers stop drilling oil that is not needed.
  2. When the speculators putting on "paper oil" trades get wiped out.

Energy Q&A

Paper Oil

Oil is another example of leveraged trades. Even more so than gold, speculators will not take delivery.

For discussion of delivery issues related to gold, please see Gold "What If?" Silliness

It's time for personal responsibility, not bailouts of favored industries.
That's the only plan we need.

Fed Bailout Not Possible

Some readers suggested the Fed would bail out the sector. It cannot. There is no place to store the oil if the Fed bought futures and I do not believe the Fed would even if it could. 

Those expecting hyperinflation out of forced debt writeoffs and plunging prices understand neither hyperinflation nor inflation. 

Moreover, hyperinflationists and strong inflation proponents do not even understand what is most important in general: credit and the balance sheets of lenders.

For discussion, please see Hyperinflationists Come Out of the Woodwork Again.

Mish

Comments (49)
No. 1-16
davebarnes
davebarnes

Who cares?
The buzzards will pick at the corpses and then continue sucking dinosaur pee out of the ground.

tokidoki
tokidoki

Your plan is not feasible in America Mish. Bailout Nation is what this country has turned into.

Wait for the Fed's Make Oil Great Again plan.

Sechel
Sechel

Trump likes yesterday's industries. Coal, Oil, Steel, appliances, car parts. And these industries have benefited more than most from protectionism. Trump is promising to throw money at the oil industry. Doubt this means the majors but shale oil and tar sands producers. Not unimportant that a big friend and backer of Donald Trump is Harold Hamm of Continental Resources. We could be seeing the birth of a highly subsidized industry where we create zombie oil producers that sell oil at above market rates coupled with loans the industry can't pay back that the taxpayer bears the credit risk on.

It's not just the producers that will take losses if the 40% number proves accurate and I have no reason to doubt it but clo tranches backed by leveraged loans to the oil industry and banks who have exposure.

Trump is floating two dangerous ideas. Ban Saudi imports and buy oil that stays in the ground where the U.S. never takes delivery. The details of this one can't possibly be good. Doesn't take much to imagine the oil gets sold twice.

The United States became a major energy producer while world demand is decreasing . This is at its very core a supply and demand issue. No amount of government manipulation will fix that.

Greggg
Greggg

Let them go bankrupt. If there is demand at a certain price for long enough, somebody else will step in and buy the operations at a discount price.

lol
lol

Stocks have risen 50% of there lows entirely by the central banks money printing and pumping tens of $$ trillions into equities by literally around the clock money printing.Same strategy will be applied to oil,the Fed will massively ramp up oil purchases to drive prices higher,they have acres and acres of money trees and they're planting thousands of new money trees every day!

Mish
Mish

Editor

@lol and @Tokidoki - No the Fed cannot and will not ramp up purchases. No one has oil storage!

If Trump can get democrats to play along (fat chance), the "solution" is to pay oil companies for oil in the ground.

Sechel
Sechel

If Donald Trump wants to ensure a healthy oil industry for as long as we have a significant need for fossil fuels which will be for some time into the 21st century and could last decades he should be letting bankruptcy work out, encourage firms to consolidate and shut high cost oil fields. It makes no sense to see shale producers that have costs of production far above today's oil price.

It's certainly highly romantic for the United States to have become energy independent but if the industry is insolvent and unprofitable acting like a zombie industry it does nobody any good. Such an industry would be incapable of investment and exploration.

Stan88
Stan88

A middle east war can turn oil around. Expect a false flag soon in Saudi Arabia or Iraq

SteveVT
SteveVT

These producers bet on higher oil, they bet wrong. It happens. Will our govt allow it to happen? Allowing it is how you unravel the monetary position our crony capitalism has gotten us into. Lots of dislocation is going to occur and not just in oil.

TumblingDice
TumblingDice

I think I have a solution that could make oil producers happy by increasing demand and make the climate change people happy. Instead of having an annual global climate change summit - Make it MONTHLY. Gas up all the private jets and fly to Davos, which will cut into the excess oil.

Note: This is a joke in case people think I'm serious.

truthseeker
truthseeker

Normally I’m a free trade guy and agree with all of you for for the most part. But let’s try to at least be fair here and keep things in their proper perspective. Back in 2008 moving forward the Fed bailed out the banks way beyond what they needed to remain solvent and take care of depositors with the initial 800 billion dollar liquidity injection. But the Fed decided that the banks needed to be bailed out of all their leveraged derivatives with various QE’s that continue to this day. Even when former Fed chairman Paul Volcker tried to stop bank’s traders from gambling with taxpayer funds and gave them 5 years to exit these trillion dollar bets, the Volcker rule was quietly discarded. Also back in 1978, Jimmy Carter was President and when the price of crude moved from 12 dollars a barrel to around 35 a barrel, Carter slapped an excise tax, the Windfall Profits Tax on American oil producers. At the time we were importing damn near 6-7 millions of barrels a day yet no tax was placed on foreign crude imports. So when I suggest a floor for the price of America’s crude oil be set at a modest 28 dollars a barrel, considering all that has happened, am I really being out of line here? Many companies will still go under but many jobs would be saved and it would certainly not hurt the American consumer.

AWC
AWC

USO is the canary in the coal mine here. If it is in some way bailed out, then I will continue to accumulate quality, dividend paying oil related equities.

Speculators aside, oil is still “Black Gold,” and there can be no GDP expansion without the stuff. Oil’s contribution to GDP growth is called “Leverage.”

Greggg
Greggg

Hot mic at White House Briefing Room blows lid off Corona virus stats:https://www.youtube.com/watch?v=i6rXFFuthaY

awc13
awc13

cheap gas should be coming any day now....

awc13
awc13

the idiot AOC greenies are celebrating the crash of oil. they haven't thought about what cheap oil means to oil consumption.

gonna get me that H2 that i have been wanting

Herkie
Herkie

The CBOE crude oil volatility index has become meaningless. Volatility models typically assume a lognormal distribution, with prices never going to zero or below. That assumption no longer applies.

You know you are in trouble when standard financial tools become "meaningless."


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