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Oil Glut Compounded By Cracks In Global Economy

Oil Glut Compounded By Cracks In Global Economy

That would upend the financial prospects for a lot of oil and gas companies. In January, Moody’s Investors Service put 120 oil and gas companies on review for a possible downgrade as the financial positions of the entire industry continue to suffer.

Smaller companies with fewer financial resources at their disposal are more likely to have trouble with mountains of debt. In fact, the yields on speculative energy debt are spiking amid growing speculation about financial distress.

Bond yields on the Markit CDX North America High Yield Index, which tracks 100 high-yield companies, spiked to its highest level since 2012. The energy sector rose to 1,525 basis points. This is a sign of rapidly shrinking confidence in the ability of these companies to meet debt payments.

The problem for so many energy companies is that on top of the worst bust in oil prices since the 1980s is the fact that there are much broader concerns about the global economy.

The crash in oil prices was largely a supply-side phenomenon. Oil demand grew relatively steadily in recent years, but supply surged at a much faster clip. The overhang was what sent prices plunging by 75 percent in just 18 months.

But the lack of a strong rebound, while still evidence of persistent problems on the supply side of the equation, is also being driven by weak demand. The IEA said that demand grew at 1.6 million barrels per day (mb/d) in 2015, but will only expand by 1.2 mb/d this year. While it would be hard to repeat the strong 1.6 mb/d figure a second year in a row, one would think that oil selling at its lowest point in at least 12 years would spark stronger demand.

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