Eight North American oil and gas companies filed for bankruptcy in the first quarter of 2021, a record high. This fact runs counter to the optimistic forecast of the International Energy Agency (IEA), but it has an explanation.
The recovery of global economies with the deployment of mass vaccination of the population against COVID-19 served as a factor in the resumption of the rise in oil prices, which brought optimism to the oil markets.
The US government has reported declining oil inventories for several weeks in a row, while the International Energy Agency (IEA), “despite weaker-than-expected data for Q1 2021,” revised its forecast for the oil market this year by more positive.
After declining by 8.7 million barrels per day last year, the IEA now expects global oil demand to rise 5.7 million barrels per day in 2021 to 96.7 million barrels per day.
However, amid these optimistic forecasts, many US shale oil producers have filed a record number of Chapter 11 bankruptcy filings in the past three months.
Eight North American oil and gas companies filed for bankruptcy in the first quarter of 2021, according to energy and restructuring law firm Haynes and Boone. This is the highest level since 2016, in the first quarter of which 17 bankruptcies were reported when US oil futures fell below $ 30 a barrel.
This situation at the beginning of 2021 suggests that not all US energy companies have recovered from the crisis caused by the collapse in oil prices in 2020.
Oil prices bounced off the lows of a year ago: on Thursday, the price of WTI crude oil was about $ 63.4 per barrel, and the price of Brent crude was $ 65 per barrel.
Small US oil and gas companies at risk of bankruptcy
In this situation, we are talking about the collapse of smaller players in the oil and gas sector, which distinguishes it from the circumstances in 2016.
Small companies appear to be the main victims of the pandemic crisis, as the eight companies have combined debt of just $ 1.8 billion in the quarter, the second lowest in the first quarter after $ 1.6 billion in the first quarter of 2019.
At the same time, the largest debt belonged to the Colorado oil company HighPoint Resources (HPR), whose application included a debt in the amount of $ 905 million.
By comparison, last year, U.S. energy companies that filed for bankruptcy had a combined debt of $ 53 billion, the second highest since 2016, when it was $ 56.8 billion.
The situation is explained by the fact that half of the bankruptcy applicants are in Texas, which faced the suspension of factories and production due to snow storms and severe bad weather in the first quarter of 2021.
In addition to oil and gas producers, a total of five oilfield services companies have also filed for bankruptcy, with offshore drilling venture Seadrill Ltd (SDRL) accounting for the majority of the sector’s $ 7.2 billion in debt.
The situation in the oil and gas market should improve
Fortunately, many producers and oilfield service companies have already weathered the crisis and the outlook for energy demand has improved significantly since just a few months ago.
The International Energy Agency (IEA) says that the largest increase in demand will occur in the second half of this year, when strong demand growth will require an additional 2 million barrels of oil per day to maintain good supply in the markets.
The IEA report so far makes reservations that market recovery remains fragile due to rising Covid-19 cases in key consumer regions.
However, the largest economies are growing rapidly due to a return to normal living conditions thanks to mass vaccinations.
On April 22, Joe Biden announced that in the first 100 days of his presidency, the goal was achieved: 200 million vaccines against Covid, half of adults in the United States received at least one vaccine.
This is becoming a factor in raising economic forecasts – for example, in April, the IMF raised its forecast for global GDP growth for 2021 and 2022 to + 6% and + 4.4%, respectively.
Meanwhile, JP Morgan estimates that drillers in the Delaware Basin in the Permian Basin now require oil prices to be only about $ 33 a barrel to break even from the $ 40 a barrel minimum in 2019.
JPM says most US land-based drillers will profit even at current oil prices, and many are likely to even increase activity in the second half of the year and create solid momentum to increase production in 2022.