Authored by Irinia Slav via OIlPrice.com,
Just when international oil benchmarks are sliding down, banks are preparing to review the credit lines of U.S. E&Ps. Starting in April, lenders will reassess companies’ creditworthiness on the basis of reserves, production trends, current prices, and future prospects for the industry, among others. Should anything spark worry, banks will be quick to start reducing their exposure, cutting credit lines and arresting producers’ recovery at a crucial point.
This year, U.S. E&Ps have announced an overall spending increase of $25 billion from 2016, an 11-percent rise, as a clear sign of continuing optimism after the November OPEC-non-OPEC deal that aimed to shave 1.8 million barrels of crude off daily global supply.
Besides boosting spending plans, producers have been adding rigs at a respectable pace: at the end of last week, active oil and gas rigs in the United States totaled 789, an increase of 313 over a year ago. They are also investing in more efficient drilling technologies, aiming for ever lower production prices in the aftermath of the oil price crash.
The banks could put a stop to all this if they deem the outlook for oil prices or any other element of their assessment methodology unfavorable. For oil prices, more bad news seems to be on the way if we are to trust Goldman Sachs.
The investment bank said in a note yesterday that record-high investments in 2011-2013 could start bearing fruit this year and the next two, adding around a million barrels of crude to global daily production on an annual basis in the period 2017-2019. That will only happen if the mega projects that swallowed the huge investments deliver as expected, which is by no means certain.
This message contrasts with an earlier one, contained in another note to investors, which saw global oil supply tightening thanks to the OPEC deal. In fact, at the time – a month ago – Goldman was of the opinion that the draw in global stockpiles would completely offset the rise in U.S. shale output.
But for now, Brent crude is now trading below $51 and WTI has dropped below $48 a barrel. Investors are watching OPEC again for a possible extension of the production cut deal, but it’s still uncertain if it will happen, and even if it does, no one knows what the effect of an extension would be.