Oil closed at slightly above $48 a barrel on Friday. Now fracking shale oil has been unprofitable for several months but the decline in the price came as a bit of a surprise as this time of year stocks of crude oil should be declining but instead they continue to rise.
Oil prices, which began dropping in mid-June when New York futures were trading around $61 a barrel and London was around $65, continued falling this week as oil inventories continued to rise. New York futures closed Wednesday at $49.19, the lowest since April, and London at $56.13. Once again the markets, which were expecting a decline in US crude stocks, were surprised by a build in inventories which increased by 2.5 million barrels last week despite refinery utilization rising to 95.5 percent of capacity, a new high for the year. A surge in crude imports to over 7.9 million b/d contributed to the inventory build. Stocks at Cushing, Okla. climbed by 813,000 barrels which increased the WTI/Brent spread to $7.
Shale oil fracking has been unprofitable for some time but now the Wall Street Banks are getting worried.
As prices continue to fall, concerns are increasing on Wall Street as to the quality of their loans to unprofitable oil and gas companies. Many banks are starting to set aside money to cover bad loans which eat into banking industry profits. In recent years Wall Street has been the biggest ally of the “shale revolution” by allowing companies to exceed their debt limits time after time in hopes that they would someday turn profitable. With US oil prices now below $50 a barrel and unlikely to climb significantly during the next year or so, bankers are demanding that drillers reduce their credit lines and increase equity. In response US oil producers have raised some $44 billion by selling bonds and shares in the first half of this year. More than $22 billion of the $235 billion of the debt owed by 62 North American oil companies, however, is “distressed” and unlikely to be paid back.
To add insult to injury the Oklahoma just decided that individuals and governments can sue oil companies for earthquake damage.
If you live in Oklahoma, and you’ve been injured by an earthquake that was possibly triggered by oil and gas operations, you can now sue the oil company for damages.
That’s the effect of a ruling by the Oklahoma Supreme Court, which on Tuesday rejected efforts by the oil industry to prevent earthquake injury lawsuits from being heard in court. Instead of being decided by juries and judges, the industry was arguing that cases should be resolved by the Oklahoma Corporation Commission, a state regulatory agency.
The state’s high court rejected that argument.
The economics of the Ontario tar sands are also impacted. New exploration has been cancelled and existing projects are being cut back. It’s simply not profitable and there is no indication it will be in the foreseeable future.
There are several reasons for this:
- The OPEC countries are flooding the world with oil in an attempt to drive the fracking companies out of business.
- The deal with Iran means there will be Iranian oil on the market again.
- The world is simply using less oil.
Fracking seemed like a good idea economically when oil was at $100 a barrel, at less than 50 or even 60 not so much