Morgan Stanley Sees Oil Bust as Worst Since at Least 1970
Bank says this crude crash more intense than mid-'80s collapse
By Collin Eaton
Houston Chronicle
January 11, 2016 10:12pm
Oil prices dropped again Monday, extending 2016's unbroken losing streak and worsening a bust in Houston's key industry that is shaping up as the most severe in almost half a century.
Morgan Stanley said the crash in crude markets has pushed prices down further and lasted longer than the five other major downturns since 1970 - even the one in the mid-1980s that left Texas' economy reeling.
"No floor in oil prices has been found so far," the bank said, predicting crude prices won't begin recovering until the second half of this year at the earliest.
So far, the United States has lost 70,000 oil and gas jobs to the current downturn, and the economic toll is expected to reverberate across Texas. Robert Kaplan, president and CEO of the Federal Reserve Bank of Dallas, said Monday that the state's once-surging job growth could fall to 1.3 percent, a third of what it was in 2014.
"Expectations have decidedly shifted to an 'even lower for even longer' price outlook," Kaplan said in remarks prepared for a speech in Dallas Monday evening.
U.S. crude fell $1.75 to $31.41 a barrel on the New York Mercantile Exchange, its lowest point since December 2003 and a 15 percent drop since New Year's Eve. Brent, the international standard, declined $2 to $31.55 a barrel in European trading. Both benchmarks briefly fell below $31 before inching back up.
The price already is below the break-even point for many drillers in U.S. shale fields, where technological advances have boosted production from the dense rock and contributed to a global glut that has sunk prices. Oil has to trade for around $45 to bring a profit in Texas' top two fields, the Permian Basin and Eagle Ford Shale, and it dropped below that level for several months last year.
Barrels selling for less than $32 apiece will barely cover wages and electricity bills for even the low-cost, conventional oil fields that make up more than half of U.S. crude production, according to French bank Société Générale.
"This is going to be a very messy process," said Michael Haigh, global head of commodities research at Société Générale. "A lot of it is very much underwater. We're at prices right now where people are in trouble."
Morgan Stanley believes major oil company earnings will drop 30 percent to 70 percent this year. But smaller domestic drillers with high levels of debt could face much bigger hurdles.
Down even further?
If crude prices stay under $35 a barrel for long, more than half of the U.S. oil and gas firms that took out billions in risky corporate debt in recent years will have to go through some sort of restructuring, including bankruptcy, said Shaia Hosseinzadeh, head of energy and natural resources at private equity firm WL Ross & Co.
Currently, he said, around 45 percent of those high-yield bonds - known as junk bonds - are trading at distressed levels, which means they're at high risk of default.
Domestic oil producers took out that debt to fuel the nation's oil and gas surge of the past few years, but they got a hefty bill when booming production caused oil prices to collapse.
"They're going to need some kind of fix," Hosseinzadeh said.
The fix isn't likely to come from the oil market, as nothing on the immediate horizon appears likely to keep crude prices from falling further - and in fact, geopolitical events could push crude lower, said Andy Lipow, president of Lipow Oil Associates in Houston.
Within a few weeks, for example, the International Atomic Energy Agency could clear the last regulatory hurdles for Iran to put its crude back into circulation in most global markets. The United States and other western powers agreed last summer to lift financial sanctions that had kept most Iranian oil off global markets in exchange for constrains on the Islamic Republic's nuclear program.
Iranian President Hassan Rouhani said on Monday Iran could be within days of having sanctions lifted, echoing remarks last week by U.S. Secretary of State John Kerry.
'Fed the shale beast'
Morgan Stanley predicted that crude prices won't recover in the first part of this year, largely because the Saudi Arabia-led Organization of the Petroleum Exporting Countries continues to pump oil "at will" and the prospect of more crude from OPEC member Iran looms large over the market.
The financial pressure of cheap crude has started to cut into high-cost U.S. shale production but it is also expected to bring overall output outside of OPEC down this year by at least 700,000 barrels, according to Wood Mackenzie.
That could help set the stage for an oil-price recovery later this year, but it also shows the fiscal difficulties of maintaining production while crude falls.
Hosseinzadeh said Russia, some countries in Latin America and other producers outside both OPEC and the U.S. shale plays already are struggling to stay in the market at current oil prices.
A production decline big enough to affect crude prices, however, may take a while to materialize.
Haigh of Société Générale pointed out that the $100-a-barrel price of less than two years ago motivated so much production that it sent prices down.
"$100 oil didn't work. It fed the shale beast," Haigh said. "$75 sounds about right. But it's going to take a long time to get there."
Collin Eaton
By Collin Eaton
Houston Chronicle
January 11, 2016 10:12pm
Oil prices dropped again Monday, extending 2016's unbroken losing streak and worsening a bust in Houston's key industry that is shaping up as the most severe in almost half a century.
Morgan Stanley said the crash in crude markets has pushed prices down further and lasted longer than the five other major downturns since 1970 - even the one in the mid-1980s that left Texas' economy reeling.
"No floor in oil prices has been found so far," the bank said, predicting crude prices won't begin recovering until the second half of this year at the earliest.
So far, the United States has lost 70,000 oil and gas jobs to the current downturn, and the economic toll is expected to reverberate across Texas. Robert Kaplan, president and CEO of the Federal Reserve Bank of Dallas, said Monday that the state's once-surging job growth could fall to 1.3 percent, a third of what it was in 2014.
"Expectations have decidedly shifted to an 'even lower for even longer' price outlook," Kaplan said in remarks prepared for a speech in Dallas Monday evening.
U.S. crude fell $1.75 to $31.41 a barrel on the New York Mercantile Exchange, its lowest point since December 2003 and a 15 percent drop since New Year's Eve. Brent, the international standard, declined $2 to $31.55 a barrel in European trading. Both benchmarks briefly fell below $31 before inching back up.
The price already is below the break-even point for many drillers in U.S. shale fields, where technological advances have boosted production from the dense rock and contributed to a global glut that has sunk prices. Oil has to trade for around $45 to bring a profit in Texas' top two fields, the Permian Basin and Eagle Ford Shale, and it dropped below that level for several months last year.
Barrels selling for less than $32 apiece will barely cover wages and electricity bills for even the low-cost, conventional oil fields that make up more than half of U.S. crude production, according to French bank Société Générale.
"This is going to be a very messy process," said Michael Haigh, global head of commodities research at Société Générale. "A lot of it is very much underwater. We're at prices right now where people are in trouble."
Morgan Stanley believes major oil company earnings will drop 30 percent to 70 percent this year. But smaller domestic drillers with high levels of debt could face much bigger hurdles.
Down even further?
If crude prices stay under $35 a barrel for long, more than half of the U.S. oil and gas firms that took out billions in risky corporate debt in recent years will have to go through some sort of restructuring, including bankruptcy, said Shaia Hosseinzadeh, head of energy and natural resources at private equity firm WL Ross & Co.
Currently, he said, around 45 percent of those high-yield bonds - known as junk bonds - are trading at distressed levels, which means they're at high risk of default.
Domestic oil producers took out that debt to fuel the nation's oil and gas surge of the past few years, but they got a hefty bill when booming production caused oil prices to collapse.
"They're going to need some kind of fix," Hosseinzadeh said.
The fix isn't likely to come from the oil market, as nothing on the immediate horizon appears likely to keep crude prices from falling further - and in fact, geopolitical events could push crude lower, said Andy Lipow, president of Lipow Oil Associates in Houston.
Within a few weeks, for example, the International Atomic Energy Agency could clear the last regulatory hurdles for Iran to put its crude back into circulation in most global markets. The United States and other western powers agreed last summer to lift financial sanctions that had kept most Iranian oil off global markets in exchange for constrains on the Islamic Republic's nuclear program.
Iranian President Hassan Rouhani said on Monday Iran could be within days of having sanctions lifted, echoing remarks last week by U.S. Secretary of State John Kerry.
'Fed the shale beast'
Morgan Stanley predicted that crude prices won't recover in the first part of this year, largely because the Saudi Arabia-led Organization of the Petroleum Exporting Countries continues to pump oil "at will" and the prospect of more crude from OPEC member Iran looms large over the market.
The financial pressure of cheap crude has started to cut into high-cost U.S. shale production but it is also expected to bring overall output outside of OPEC down this year by at least 700,000 barrels, according to Wood Mackenzie.
That could help set the stage for an oil-price recovery later this year, but it also shows the fiscal difficulties of maintaining production while crude falls.
Hosseinzadeh said Russia, some countries in Latin America and other producers outside both OPEC and the U.S. shale plays already are struggling to stay in the market at current oil prices.
A production decline big enough to affect crude prices, however, may take a while to materialize.
Haigh of Société Générale pointed out that the $100-a-barrel price of less than two years ago motivated so much production that it sent prices down.
"$100 oil didn't work. It fed the shale beast," Haigh said. "$75 sounds about right. But it's going to take a long time to get there."
Collin Eaton
No comments:
Post a Comment