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The rapidly falling oil prices have finally claimed the first victim, but
it won’t be the last. The Alberta Canadian government announced
late yesterday for a substantial cut in tar sands oil production to stem the
hemorrhaging low oil price. The price paid for tar sands oil has fallen
a stunning 77% from its peak just two months ago.
While the Canadian tar sands oil price has fallen the most, various U.S.
benchmarks are also experiencing substantial discounts to the standard
West Texas Crude Oil price. For example, the price paid for
Bakken oil has dropped by 42% from its peak in October. This
is terrible news for the shale oil producers in North Dakota.
However, as bad as the situation is becoming for the U.S. oil industry, it
isn’t as bad as the disaster taking place in Alberta, Canada. According
to the Zerohedge article, Alberta
Orders “Unprecedented” Oil Output Cut To Combat Crashing Prices:
So in a long-awaited and according to local energy traders, overdue
response, Canada’s largest oil producing province ordered what Bloomberg
called “an unprecedented output cut”, an effort to ease a worsening crisis in
the nation’s energy industry and adding to global actions to combat a recent
price crash ahead of this week’s OPEC+ summit where oil exporters will
similarly seek to slash output.
… The plan, which was announced late on Sunday, will reduce
production of raw crude and bitumen from Alberta by 325,000 barrels a day, or
8.7% from January until excess oil in storage is drawn down. The
reduction would then drop to 95,000 barrels a day until the end of next year
at the latest.
The Alberta government plans to cut oil production by 325,000 barrels per
day for three months starting in January. That will cost the
Alberta oil industry at least a half of billion dollars at current market
prices. A nice chunk of change. Unfortunately, if the
U.S. and the global economy continues to weaken in 2019, the Alberta
government may be forced to extend or increase cuts in oil production.
As we can see the Western Canadian Select oil price has fallen to a new
low compared the previous lows set at the beginning of 2016. When the
U.S. oil price was trading at $30 a barrel in January 2016, the Western
Canadian Select spot price was higher at $15. However, with the
U.S. oil price now at $53, the Western Canadian Select tar sands oil is
trading at nearly a $40 a barrel discount:
(chart courtesy of Zerohedge in the article linked above)
Now, while lower oil prices have prompted the Canadian government to issue
a mandatory oil production cut, market forces will likely be the primary
factor reducing U.S. shale oil supply. Why? Well, the prices paid
for oil from the various shale fields and regions have also traded at a
steeper discount to the standard U.S. WTI oil price. For
example, Bakken oil (Williston sweet crude) fell to a low of $39.55 a barrel
from its peak of $66.50 in October.
Furthermore, the price paid for oil coming from the second largest shale
field in the United States, the Eagle Ford, has fallen 36% from its peak in
October. All of these benchmarks are trading at a much larger discount
to the standard West Texas Oil price, which is down 30% from its high of
$76.41. So, as we can see, the higher cost unconventional oil supply
sources are suffering the lowest prices. No doubt, a double-edged
sword.
The U.S. shale oil industry is in deep trouble as 75% of the companies are
still suffering from negative free cash flow. While I have written
about this many times, one of my readers sent me the following article by
Rystad Energy, MORE
THAN 75% OF DEDICATED US SHALE OIL COMPANIES KEEP REPORTING CAPEX IN EXCESS
OF CFO:
Essentially, the market is still not convinced that a typical shale oil
E&P is able to grow in a self-sourced manner as more than 75% of
dedicated US shale oil companies keep reporting capex figures in excess of
cash flow from operating activities.
What is important to understand is that even with higher oil prices this
year, three-quarters of the shale companies are still spending more than they
are making. Morever, the U.S. shale energy industry has racked up
nearly $300 billion in debt. What happens if the oil price continues to
slide during the winter months? I have heard from someone in the
industry that energy companies are already laying off workers.
If the oil price continues to weaken over the next 3-6 months, I believe
the U.S. shale oil industry could be in serious trouble. While
the Canadian government cut oil production in Alberta to save its tar sands
industry, I bet my bottom dollar that good ‘ole fashion market forces will do
the trick for pushing the U.S. shale oil industry over the cliff.
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