Oil Producers Under Pressure – 2/3/16

Oil producers see continued declines in revenue and investment under unexpectedly low oil prices.

Small US oil producers are set to face bankruptcies throughout 2016 as oil prices are expected to stay below $40 a barrel for most of the year, while even larger companies like Exxon are losing prestige as they are forced to choose between ratings cuts and dividend cuts. Cheap credit allowed US shale producers to last out 2015. It gave the companies enough of a lifeline that they could run leaner and defy expectations from most analysts. Few major Wall Street banks predicted an end to a multi-year bull market, and no banks  predicted that prices could fall so far so fast as evidenced by their recent scrambles to adjust expectations down to as low as $20 a barrel. And as a result of the gloomy atmosphere, even firms that seemed invincible are at risk of losing that reputation. To maintain dividend payouts, companies like Exxon and Chevron, must go further into debt at a time when they seem riskier than ever to credit rating agencies. However, failure to maintain payouts would be proof of weakness to investors. At this point, the companies appear more threatened by the loss of face as many opt to pay off investors in order to delay the realization that oil isn’t the long-term investment it once was.

Few countries have been hit harder by low oil prices than Russia. Only Venezuela and Brazil are set to see similar levels of GDP contraction among oil-dependent nations and Russia faces numerous issues with low government revenue, shrinking currency reserves, surging domestic prices and debt, and large amounts of military spending. Stagflation is inevitable for the country which relies heavily on oil exports to maintain its economy. With a “lower for longer” oil environment becoming the general consensus of industry experts, Russia is in for a lot of pain if it can’t reduce its dependence on commodities.

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