Crashing Oil Prices Could Bring The US Fracking Boom To A Sudden And Disastrous End

[mystery-ak]

http://www.businessinsider.com/energy-companies-making-up-high-yield-bonds-2014-10

Crashing Oil Prices Could Bring The US Fracking Boom To A Sudden And Disastrous End

    Sam Ro

    Nov. 3, 2014, 3:17 PM

Technological advances in hydraulic fracturing have fueled what some call the Great American Shale Boom. Oil and natural gas extracted from shale basins have left the US flush with energy. It's been a boon for US energy-related jobs and equipment suppliers.

But it's not cheap to tap these so-called unconventional plays.

In other words, crashing oil prices will soon make many of these energy sources money-losing projects. Morgan Stanley estimates the average breakeven oil price for these US plays to be about $76 to $77 per barrel. Goldman Sachs puts that number at closer to $75.

If the price of oil can't cover production expenses and these companies are forced to idle their operations, then you could expect spending to drop, jobs to get cut, and delinquencies and defaults to rise.

To make matters more complicated, many of these energy companies are financing their operations by borrowing in the junk-bond market, which means borrowing rates are relatively high.

"As oil prices have fallen recently, so have prices of high-yield bonds," Charles Schwab's Collin Martin wrote in October. When bond prices fall, rates rise.

"Oil prices can have a broad impact on the high-yield bond market because energy corporations have been increasing their share of the high-yield bond market. Today, energy companies make up more than 15% of the Barclays U.S. Corporate High-Yield Bond Index. That's up from less than 5% of the index at the end of 2005—and the chart below shows that the share has been steadily increasing over the past decade."

Even worse, this comes as interest rates are broadly expected to go higher from here:

[Oceander]

To every up there is a down.

[jmyrlefuller]

End? Probably not.

Halt, perhaps. Then prices will rise again with shortened supply and a balance will be reached.

[Oceander]

End? Probably not.

Halt, perhaps. Then prices will rise again with shortened supply and a balance will be reached.

Of course.

[truth_seeker]

In the early/mid 1970s I calculated rates of return, on secondary recovery projects, for a midsized oil company.

The price of oil at the time, pre-1972 Mideast embargo, was about $2.50 per barrel. We made wild guesses about where it might go, like up by 50% to $4 or even $5 per barrel?

Since then prices have fluctuated, sometimes with OPEC manipulations, and sometimes for other reasons.

So if prices fall to levels which won't support fracking, then supply will fall which will drive prices back up. Don't despair.

And don't overlook the fact, the US is a technology leader.

[massadvj]

All markets fluctuate.  It's part of what is necessary in capitalism to keep things in equilibrium.

In the present case, it looks like there has been a softening in the commodity markets in general as prices of precious metals and other commodities have also been depressed of late.  The cynic in me suspects that it was driven at least partly by the need to improve consumer sentiment prior to the election.  We'll see what happens now that the election is over.  I can tell you I have been buying silver ever since it went south of $20 and I will continue to do so.

As for the economy generally: some jobs in the fracking industry might be harmed by lower energy prices, but many new jobs will be created as every other industry saves money on energy costs. 

[Oceander]

All markets fluctuate.  It's part of what is necessary in capitalism to keep things in equilibrium.

In the present case, it looks like there has been a softening in the commodity markets in general as prices of precious metals and other commodities have also been depressed of late.  The cynic in me suspects that it was driven at least partly by the need to improve consumer sentiment prior to the election.  We'll see what happens now that the election is over.  I can tell you I have been buying silver ever since it went south of $20 and I will continue to do so.

As for the economy generally: some jobs in the fracking industry might be harmed by lower energy prices, but many new jobs will be created as every other industry saves money on energy costs. 

Prices in commodities may be softening because of the softening of the Chinese economy.

[massadvj]

Prices in commodities may be softening because of the softening of the Chinese economy.

Yeah, plus the Chinese central bank has been dumping gold, and that has a ripple effect throughout all other commodities.

[EC]

End? Probably not.

Halt, perhaps. Then prices will rise again with shortened supply and a balance will be reached.

Fracking wells aren't oil wells. Consider them more like nuclear power plants - you can shut them down, in time, and they are total buggers to restart again, if you can do it at all. It'd make more sense to shut down the actual oil wells to balance the market - assuming a company is actually heavily involved in both.