Tough war ahead to stabilise oil prices as shale producers file bankruptcies

A rash of bankruptcy filings from shale oil producers reveals the destructive impact the coronavirus-induced slow oil price is having on US oil production and the battle ahead to keep oil markets stable.

Shale producers, including Whiting Petroleum, a major shale driller in North Dakota, filed bankruptcy in April. Chesapeake Energy, a shale pioneer, declared bankruptcy in June and Diamond Offshore Drilling is filing for bankruptcy next month.

Analysts say more companies will follow the same route. Almost 250 oil and gas companies could file for bankruptcy protection by the end of next year, more than the previous five years combined, according to Rystad Energy, an analytics company.

Rystad analysts now expect oil demand will begin falling permanently by decade’s end as renewable energy costs decline, energy efficiency improves, and efforts to fight climate change diminish an industry that has spent the past decade drilling thousands of wells, transforming the United States into the biggest oil producer in the world.

Read also: Why the market is not sold on the idea of a big rebound in oil prices

The death of these oil companies signals the battle oil producers, including Nigeria, will have to fight to stabilise prices.

The Organisation of Petroleum Exporting Countries (OPEC) in consort with non-OPEC members, including Russia, have used supply caps to rein in the market but that tool is looking blunt in view of frequent violations and low demand.

Oil slipped in early Asian trade on Monday as traders look to an OPEC technical meeting this week which is expected to recommend an easing in supply cuts that have been propping up crude prices.

Brent crude fell 27 cents to $42.97 a barrel early Monday while US West Texas Intermediate crude was at $40.27 a barrel, down 28 cents.

Oil prices recovery has slowed as a resurgence of coronavirus cases prompted several US states to impose tighter travel restrictions that could dampen oil demand recovery at the world’s largest consumer.

This reduces the consequence of the slight gain of 2 percent on Friday after an upward revision by the International Energy Agency in its 2020 oil demand by 400,000 barrels per day.

Oil prices have recovered sharply from multi-decade lows in April after OPEC and allies cut output by a record 9.7 million barrels per day for three months since May.

OPEC’s Joint Ministerial Monitoring Committee (JMMC) will meet on Tuesday and Wednesday to recommend the next level of cuts.

But many shale producers are not optimistic.

Matt Gallagher, chief executive of Parsley Energy, one of Texas’ biggest independent oil producers, said the record output level struck earlier this year would be the high-water mark.

“I don’t think I’ll see 13m [barrels a day] again in my lifetime,” the 37-year-old Gallagher told the Financial Times.

Gallagher, whose company briefly traded below zero in April, has seen a recovery to around $40 a barrel since but it still leaves it beneath the break-even price for many shale producers.

The United States oil output has plunged by as much as a quarter in the last three months, as crude prices crashed in the wake of a Saudi-Russia price war and the coronavirus outbreak, prompting several operators, including Parsley, to shut wells and slash planned spending.

Soaring shale production helped the US become a net exporter of petroleum in November last year – a stunning reversal for a country that imported more than 10m b/d a decade earlier. Since May, however, that has reversed and net imports have trended upwards.