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The New Cartel Running the Oil Sector
The New Cartel Running the Oil Sector
As oil prices wallow near multi-year lows, it’s becoming increasingly clear that the new cartel controlling oil prices is not OPEC but world credit markets. From Saudi Arabia’s record $100 billion deficit to shale oil’s continuing reliance on cheap credit funding, it’s clear that no major oil producer or company in the world right now is economically self-sufficient based on oil revenues alone. This situation has left the flow of oil and the decision on when to stop pumping the increasingly tarnished black gold in the hands of banks rather than oil men.
The idea that bank loans to oil companies may be in trouble is not new but there are increasing signs of late that these distress energy loans could end up defaulting and leaving banks with a mess to deal with. At the national level, countries like Saudi Arabia won’t forfeit their assets to creditors of course, but their ability to keep running deficit funding is going to increasingly depend on bond market appetite for energy related debt. That could be problematic in 2016. With the Federal Reserve starting to raise interest rates, bond investors may find that they don’t need to invest in energy debt to garner yield as they have in 2015, and this in turn could start to crimp oil production.
Economists often like to cite cartels as having the power to control production, but at this point it looks like the only group with any ability to actually curtail (or expand) production are the major banks that direct capital market flows. Of course that production power is indirect, but it is real nonetheless.
Banks are not required to disclose the loans they hold to investors and Federal regulators don’t disclose this data either as it would potentially risk a run on certain banks, but regulators are definitely taking note of energy related loans in bank portfolios.
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Who’s afraid of $50 oil? (Answer: Canada’s oil industry)
Oil below $50 a barrel could spur another leg down for Canada’s oil industry
It may be high summer on the calendar, but Canada’s energy companies are already looking towards the coming winter.
What they see is looking worse now than it was even a month ago.
After a rough start to the year that saw companies lay off thousands of workers amid falling crude prices, lower cash flow and wounded share prices, a spring rally in oil was stirring hopes the dreaded other shoe might not drop.
A July-long slide took oil prices back below $50 a barrel, so a rally is looking less likely.
“It’s a very difficult time in our industry, one of the most difficult in decades,” said Tim McMillan, chief executive of the Canadian Association of Petroleum Producers, the lobby group for the energy industry. “The mantra that I’ve heard pretty consistently from companies is preparing for lower for longer.”
Whether the earlier rounds of staffing cuts and budget reductions are preparation enough to weather what’s expected to be a dismal winter drilling season is a question that is already starting to be answered.
In the next few weeks, Canada’s oil companies will get down to the serious work of crafting next year’s budgets. Those plans will come together in September on the way to getting approved in November.
Winter drilling season
For Canada’s oil sector, the winter drilling season, which begins when the ground freezes enough for heavy equipment to move through the northern parts of the country, is where the rubber will hit the road for the industry.
Western Canada’s oil business follows a predictable quarterly pattern; busy in the first three months of the year, which is where companies make a lot of their money. Quiet for the next three during spring breakup, when rigs are taken down and moved through the muskeg before the seasonal warmth thaws the ground. And then a ramp-up through the second half of the year, which launches companies back into the peak busyness of winter.
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