Oil prices continue to fluctuate in a relatively narrow band around $50 for WTI and $60 for Brent. On March 6, Baker Hughes reported another round of declining rig counts. Only this week the pace of cutbacks accelerated. An estimated 75 rigs were removed from the oil patch for the week ending on March 6, a big jump from a week earlier. It is important to remember that week-to-week numbers are largely statistical noise; the long-term trend line is more important. Still, after several weeks in which the rig count collapse appeared to be slowing, last week’s figures are a reminder that the rout is not over yet. After all, production has not dropped off – U.S. production surpassed 9.3 million barrels of oil per day in February, the highest level in decades.
Still, the falling rig count is evidence that OPEC’s strategy is working, something emphasized by its top official over the weekend. OPEC’s Secretary-General Abdallah Salem el-Badri spoke at the Middle East Oil and Gas Conference in Bahrain on March 7, in which he highlighted the growing cracks in the U.S. shale industry. His comments echoed confidence in OPEC’s strategy of undermining its main competitor. Without explicitly saying so, he emphasized that OPEC will successfully force some shale production out of the market as private companies pullback on investment. “When OPEC didn’t reduce its production, everything collapsed for the U.S. shale-oil-rig market,” el –Badri said. At the same time, he cautioned that the industry may be cutting too much, which could lead to a price spike in the future. “Projects are being canceled. Investments are being revised. Costs are being squeezed,” he warned. “If we don’t have more supply, there will be a shortage and the price will rise again.” Not that that would necessarily be a bad thing for OPEC.
But as el-Badri noted, low prices are indeed putting a strain on the industry. Significantly lower revenues for oil and gas exploration companies have sparked a wave of credit downgrades, which along with new bond offerings, are contributing to an unsettling level of “junk” bonds. The energy sector accounts for a large and growing share of the high-yield credit market. Junk bonds in the energy sector have reached $247 billion, or 17.5%, the highest share for any industry. The growing level of debt with poor credit ratings is beginning to concern big banks, which warn that defaults are most likely just around the corner.
Full article: OPEC Boasts About Pain In U.S. Shale (Oil Price)