Second Half, Second Thoughts | Russell T. Rudy Energy LLC
Many industry observers predicted that in the second half of 2016 prices would rise and oil companies would experience better times. However, according to an article in “Rigzone” many oil and gas operators are not betting on a rally.
Last year, July was a brutal month with prices dropping 21% and some fear that history might repeat itself. In fact, oil prices have fallen since early June and many producers are hedging production to lock in current prices as they fear a future downturn. Hedging is not the only strategy operators are employing to raise cash. Many are selling equity in order to get more liquid in anticipation of hard times ahead.
Laredo Petroleum has hedged more than 2 million barrels of 2017 production, and industry wide, hedges are up 29% this year. For those companies which have survived so far, hedging has become a critical lifeline. Since January of 2015, 85 North American producers have gone bankrupt and the lessons have not been lost on the survivors.
Many producers have taken advantage of the recent rally and are selling stock at a record pace. According to Bloomberg, they have raised more than $16 billion in equity capital to repay debt or strengthen balance sheets in order to weather a future downturn. John Kilduff, with hedge fund Again Capital, observes, “They’re trying to generate cash to stay alive and fight another day. The producers know full well that the oil market is not out of the woods yet.”
If history is any indication, such prudence is advisable. Oil fell 49% in the second half of 2014, and 38% in the second half of last year.
Many analysts had predicted a surge in domestic gasoline demand this summer and inventories were accumulated in anticipation. However, supply has outstripped demand to the point that gasoline stocks have grown to over 240 million barrels, an all-time seasonal high, in the week ended July 8. The surplus is now so large that at least five tankers with gasoline destined for New York have been turned away.
Stephen Schrock, with the consulting firm, Schrock Group, concludes that “Demand is strong, but supply is even stronger.” In fact, he thinks the gasoline glut could send oil prices tumbling below $40.
Again Capital’s Kilduff concurs, stating that “The rising inventories of gasoline have the markets’ attention. The oil market is getting ready to break.”
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/145698/Oil_Producers_Prepare_for_SecondHalf_Slump_as_Rally_Sputters?utm .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
