The Rise of Black Gold

The Rise of Black Gold

Black Gold: During the holidays, my family and I went to New York to watch a few Broadway shows. One of them was a big magic production, something my son wanted to see ... a kind of tribute at the beginning of the 20th century and the 'Golden Age of Magic'.

Was it filled with tricks never seen before? No not really.

But the artists were so skilled, along with the dramatic music and lighting effects ... maybe I didn't suspend the disbelief, but the less rational side of my brain was happy to look the other way for a few nice hours.

This way you sell tickets for a magical show on Broadway.

In order of great illusions, Wall Street has one of them: the idea that American shale oil producers will somehow rush and save us from higher oil prices in the coming months and years.

The shale oil industry is unable to save American consumers by speeding up production.

This can be seen in the hedging activities of shale companies. As Bloomberg noted last month, when oil prices exceeded $ 50 a barrel after the December OPEC meeting, American shale producers hurried to cover those prices.

The key here is what this says about the vision of shale oil producers on risks. For the time being, they prefer to just keep on going and take a lower but guaranteed payout of $ 50 per barrel for their future oil production - instead of betting on earning much more money by staying unharmed when prices hit $ 60.

It is wise to do that. But the tricky part is this ...

Shale companies need all the money they can get. Because old sources are quickly empty in the fracking game. They must be replaced with new ones. This requires a continuous stream of cheap money.

It was easy enough to do when oil was above $ 100 and the long-term cost of fracking a well was around $ 50 to $ 60 per barrel. These days it is just enough to keep the light on and to settle the debt burden of the bargains.

So if you look at the chart of US oil production in the last three years, don't expect a parabolic rise to the heights of 2015 when oil-crushing companies pumped more than 9.5 million barrels per day.

Shale breast milk

Banks are also not interested in increasing their loans to shale companies, despite the recovery in oil prices in 2016.

At the end of last month, Reuters noted that of the nearly three dozen large shale oil companies that it follows, only a third - 12 companies - saw credit lines rise. The rest had either reduced their access to bank credit or left it unchanged.

Banks will also not easily forget the madness that they have written off piles of bad debts when the bubble burst in 2014 and 2015.

What about bond investors? Can they be expected to pick up the financial margin as they did during the fracking boom?

Don't count on it. Interest rates are higher, so financing costs are more expensive than at the peak of the boom.

And it does not help to sell new speculative bonds when, despite the higher oil prices in the past year, the wave of shale-related bankruptcies will rise.

In the past two years, 114 oil field drilling and service companies have been on the rise, according to law firm Haynes and Boone from Texas, which specializes in bankruptcy applications.

But as Moody's notes, more companies are likely to join those ranks because $ 21 billion in bonds, borrowed during the boom, must be repaid to investors in 2018. It continues to rise from there to a peak in 2021, then nearly $ 29 billion will be canceled.

Perhaps the best future perspective of experienced bankers for the oil industry comes: "This will leave a bad taste in our mouth for years," a banker told the Houston Chronicle last summer when his company had to write off nearly $ 10 million in broken loans.

Another said: "There may be an extension, but no flowering. The credit will be limited for some time."

But without credit (or rather, cheap credit), American production cannot grow significantly. That is why we stick to the higher path for oil prices.