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US Crude Oil Production Plunged Most Ever, Natural Gas Followed: The Great American Oil & Gas Bust, Phase 2

US Crude Oil Production Plunged Most Ever, Natural Gas Followed: The Great American Oil & Gas Bust, Phase 2  

Precisely what’s needed to end the price collapse. But last time, it wasn’t long before Wall Street liquidity surged back into shale, starting the cycle all over again.

US crude oil production in May plunged by 1.99 million barrels per day, from 12 million b/d in April to 10 million b/d, the largest monthly drop since at least 1980, and the sixth monthly drop in a row, according to the EIA.

This comes after the collapse in demand for transportation fuels – especially gasoline and jet fuel – that started in March and exacerbated the oil glut and a downward spiral of the already depressed prices for crude oil. Amid a torrent of bankruptcy filings by oil-and-gas companies, drillers cut drilling activity and production. This trend restarted last year, after having subsided somewhat following phase 1 of the Great American Oil Bust in 2015-2016, but took on record proportions during the Pandemic. From the peak in November 2019 of 12.86 million b/d, production has now plunged by 22.2%:

In the chart above, note how production doubled between mid-2012 and November 2019, despite the drop in production in 2015-2016.

The chart below shows the the price of benchmark crude oil grade West Texas Intermediate. Note how the price recovery from late 2016 ended in the fall of 2018 and then reversed, as production surged. The price decline bottomed out on April 20, when for a brief period the price of WTI plunged below zero, a bizarre moment in the history of crude oil:

Texas, the state with by far the largest production in the US and the epicenter of the oil-and-gas bankruptcy filings, was also the state with the largest production cuts, in terms of million b/d. Peak production occurred in March 2020 at 5.44 million b/d. By May production had plunged 19% to 4.39 million b/d.

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Trump’s Golden Era of Energy Is Turning to Lead

Trump’s Golden Era of Energy Is Turning to Lead

 A drilling rig on a former ranch outside of Barstow, Texas, in the Permian Basin

It was just over a year ago that President Trump announced, “The golden era of American energy is now underway,” saying that his policies focused on exploiting oil, gas, and coal were “unleashing energy dominance.” 

What a difference a year makes. On July 10, the Financial Times ran an article with a headline that asked, “Is the party finally over for U.S. oil and gas?” And there is no doubt that it has been quite a party for the last decade. At least, for the fracking executives who have enriched themselves while losing hundreds of billions of dollars investors gave them to produce oil and gas. Meanwhile, profits never materialized.

Lately, prospects for the broader fossil fuel industry look more like lead than gold.

For starters, the oil and gas industry in America is facing an era of losses, bankruptcies, canceled projects, and declining demand. It is highly likely that history will show that this point in time was the beginning of the golden era of renewable energy and the decline of the fossil fuel industry. 

Fracked Shale Oil and Gas Industry Failing

President Trump’s 2016 campaign was backed heavily by the oil and gas industry, with strong support from fracking CEOs like Continental Resources’ Harold Hamm. The story of record American oil production due to fracking was even being touted by President Obama, who rightfully took credit for the fracking boom that occurred on his watch. That’s despite President Trump recently taking credit for it as well. 

But as we have documented over the last two years at DeSmog, the fracked oil industry has been a financial failure for more than the past decade. The industry produced record amounts of oil and gas but lost huge sums of money in the process. And now even industry leaders are admitting the U.S. oil industry has already peaked, a little more than a year after President Trump declared the beginning of the “golden era.” 

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Financial Sector To Cut Credit Supply Lines For Oil And Gas Industry

Financial Sector To Cut Credit Supply Lines For Oil And Gas Industry

More U.S. oil and gas companies could come under financial distress in the coming months as crucial hedging protection begins to expire.

Many companies had locked in high prices for their oil sales last year, allowing them a degree of protection as oil prices collapsed precipitously over the second half of 2014. Few, if any, hedged all of their production though, so revenues declined along with the oil price. Still, with some protection, the vast majority of companies (aside from a tragic handful) have not missed debt payments and have stayed out of bankruptcy.

That could become an increasingly tricky feat to pull off. As time passes, more and more hedges are expiring, leaving oil companies fully exposed to the painfully low oil price environment. “A lot of these smaller guys who had bad balance sheets have pretty good hedge books through full-year 2015,” Andrew Byrne, an analyst with IHS, told the Houston Chronicle. “You can’t say that about 2016.”

Related: Is George Soros Betting on the Long-Term Future of Coal?

In fact, about one-fifth of North American production is hedged at a median price of $87.51 per barrel. Smaller companies rely much more heavily upon hedging as they are more vulnerable to price swings and are not diversified with downstream assets. Across the industry, IHS estimates that smaller companies had about half of their production hedged at a median oil price of $89.86 per barrel in 2015.

But as those positions expire, any new hedges will be linked to current oil prices, which are now trading around $45 per barrel (although prices are fluctuating with great intensity and ferocity these days).

More worrying for the oil and gas companies that are struggling to keep their lights on is the forthcoming credit redeterminations, which typically take place in April and September. Banks recalculate credit lines for drillers, using oil prices as a key determinant of an individual company’s viability.

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A True Jobs Massacre Spreads in US Oil & Gas

A True Jobs Massacre Spreads in US Oil & Gas

It’s been tough for US oil companies. And even tougher for their investors. The hero du jour is Marathon Oil.

Today afterhours it reported an eye-popping 48% plunge in revenues in the second quarter and a net loss of $386 million. To stem the bleeding, it slashed capital expenditures by 40% from the prior quarter. “Importantly,” as it said in the press release, it was able to reduce production costs in North America by over 30% per barrel of oil equivalent from a year ago. And it cut is general and administrative costs by more than 20%.

The key to survival in this environment of plunging revenues is conserving cash and slashing expenses, including “workforce reductions,” as the company calls them. And something else….

Marathon proudly said that its global production from continuing operations (excluding Libya) rose 6% from a year ago, with its US production soaring “nearly 30%.” And it’s not backing down either: Total company production would increase 5-7% year-over-year, with a 20% jump in production in the US.

Thus it joined the cacophonous chorus of oil and gas companies that have been bragging about production increases despite the oil glut, despite the oil price plunge, despite the mayhem in the oil markets, just when investors are desperately waiting for the ever elusive production cuts.

BP’s debacle is even worse. Last week, it announced a loss of $6.3 billion and warned of more layoffs to come. It raised the restructuring charges for those layoffs from $1 billion, put forward in December, to $1.5 billion. “We will continue to identify more opportunities for simplification and efficiency,” is how CEO Bob Dudley put it in perfect corporate-speak. And cuts are now coming at “a faster pace.”

Dozens of companies in the oil & gas sector have announced job cuts since last fall, with some of the global players, like Baker Hughes, pushing their layoff numbers into the low five-digits. It has been a relentless litany.

 

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