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Archive for the ‘Oil and Gas’ Category

Crude Oil Price Volatility Continues

Oil markets are entering an unprecedented period of uncertainty due to geopolitical instability and a fragile global economy, the head of the International Energy Agency (“IEA”) said on Tuesday.

The IEA was founded in 1974 to help countries co-ordinate a collective response to major disruptions in the supply of oil. The IEA examines energy issues including oil, gas and coal supply and demand, renewable energy technologies, electricity markets, energy efficiency, access to energy, demand side management and much more.

OPEC is advocating for an oil supply reduction of 1 million to 1.4 million barrels per day to prevent and correct crashing oil prices similar to what transpired in 2014.

Another factor contributing to the fall of oil prices is the restoration of sanctions by the United States to Iran earlier this month cutting the country’s crude exports by close to a million barrels per day.  The United States said it sanctioned six individuals and three entities to disrupt an Iranian-Russian network that it said was providing millions of barrels of oil to the Syrian government and funding militant groups Hamas and Hezbollah.

U.S. officials said Russia facilitated the delivery of oil from Iran to Syria, and that a variety of mechanisms were used in an attempt to conceal the shipments and oil-related payments.

Today Brent oil is currently trading around $62 a barrel.

Recent Fall in Oil Prices May Preview an Energy Bear Market

With the recent plummeting of oil prices, the $64,000 question is asked again-is it a greater supply or a weakening of demand that has caused lower oil prices.

As always, there are views to support both sides and most likely is a combination of an increase in supply and a diminish of demand. There are competing views to what extent oil prices are most susceptible to a change in demand versus a change in supply.

Beginning in the summer of 2018, production for oil supply had increased greatly. While production in Iran and Venezuela decreased, the United States, Russia and the Levant compensated for shortfalls throughout the world. Countries in the Middle East, specifically Saudi Arabia, increased oil supply, more than outweighing restrictions and sanctions imposed on Iran.   However, while the International Energy Agency made a call to arms for greater production of oil, it is China’s looming recession that has contributed to the fall of oil prices. China is currently importing over 8 million barrels a day of crude oil which is a significant increase from 2004 when it imported a little bit over 2 million barrels a day.

2014-2015 was the last time the price of oil plummeted. It is not a coincidence during that time the Chinese economy decelerated while the United States oil production blossomed with the shale boom. One factor China must face is its credit issue. Its economy has been slowing down over the years, but while its economy thrived it was based on debt. Now with the slowdown in its economy and of massive amount of debt, this only increases worries among economists about China’s imports and whether they could maintain the same level as in previous years.

There has always been a correlation between the London Metals Exchange Index and the price of crude oil. Industrial metals and oil prices have historically corresponded to major economic transitions. The London Metals Exchange Index has been in decline since June of this year.

The knee-jerk response to falling prices has been to cut back on the supply. However, this has not worked in the past, especially dealing with OPEC countries. Individual countries cannot resist trying to sell more volume of oil than other countries, albeit at lower prices. Many times, countries establish and strengthen overall importing and exporting ties with other countries, which far outpaces advancements in a single commodity.

At the end of the day, regardless whether oil prices dropped due to greater supply or lack of demand, this may be the catalyst of a tremendous bear market on the horizon.

Wave of US oil bond defaults to come

Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy.

If the two companies fail in March, it would be the biggest cluster of oil and gas defaults in a month since energy prices plunged in early 2015.
The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money. Drillers piled up a staggering $237 billion of borrowings at the end of September, according to data compiled on the 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S. crude production soared to its highest in more than three decades.

Oil prices have now fallen more than 70 percent from a 2014 peak, and banks and bondholders are fighting for scraps. Bond prices reflect investors’ fears. U.S. high-yield energy debt lost 24 percent last year, the biggest fall since 2008, according to Bank of America Merrill Lynch U.S. High Yield Indexes. Investors are now demanding a yield of 19.3 percent to hold U.S. junk-rated energy bonds, after borrowing costs for these companies exceeded 20 percent for the first time ever this month, according to data compiled by Bank of America Merrill Lynch.

 Both Energy XXI and SandRidge could still reach an agreement with creditors that will give them time to turn their businesses around. SandRidge said last week that it missed a $21.7 million interest payment. The company owes $4.2 billion, including a fully-drawn $500 million credit line. Energy XXI, which owes $3.4 billion, said in a filing last week that it missed an $8.8 million interest payment.

SEC Charges Oil and Gas Company and Founder with Fraud

The Securities and Exchange Commission charged Nathan Halsey and TexStar Oil, Ltd. in the United States District Court for the Northern District of Texas, with fraudulently offering securities through misleading investment materials and keeping funds from investors who believed they were investing in an entirely separate company.

The SEC’s complaint, filed in the U.S. District Court for the Northern District of Texan on February 17, 2016, alleges:

  • TexStar and its founder and CEO Halsey raised at least $1.1 million from investors in China and Southeast Asia in fraudulent securities transactions and distributed false promotional materials in an effort to raise more funds.
  • These false promotional materials described a successful, asset-rich company that held no profitable oil-and-gas assets, never drilled or produced any wells, and never generated investor returns.
  • Halsey invited Chinese investors to Texas, showed them an operating oil well owned by another company, raised funds for an alleged investment in that well, and then kept that money for TexStar, without telling investors.

The SEC’s complaint charges both defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint also charges Halsey with violating Section 16(a) of the Exchange Act by failing to make required SEC filings. The SEC’s complaint seeks permanent injunctions, civil penalties, disgorgement plus prejudgment interest, and other relief against both defendants, as well as a conduct-based injunction and an officer and director bar against Halsey.

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