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Oil Price Crisis: A Tale of Two Paradigms

May 13, 2016 (EIRNS)—The news that China is starting next month to build a new oil pipeline to Russia, highlight the shift already well advanced in the international oil trade. Exports to the two largest growing oil consumers, China and India, are now led by Russia and Iraq, not as before by Saudi Arabia and other Gulf producers. A new dynamic among major producing countries, which has been led by Russia, has caused the price of oil to rise and stabilize from levels which were threatening to wipe out global trade and production of commodities. Coordination between Russia and Iran around the next producers’ meeting, June 2, could further recover the price.

The Chinese energy group China National Petroleum Corp (CNPC) intends to commission the 942 km second phase of a crude oil pipeline to Russia by October 2017. It will double the capacity of the existing Mohe-Daqing pipeline (commissioned in 2011), 30 million tonnes/year.

The price stabilization has had absolutely no benefits for the U.S. shale oil/gas sector, which is going bust at an accelerating rate. In the past few days:

  • has reported,

"The E&P [exploration and production] sector is hitting the wall when it comes to debt. Watch for more bankruptcies coming—as well as issues emerging at U.S. banks due to growing exposure to bad energy loans."

  • The Houston Chronicle reported $51 billion in shale junk debt has gone bankrupt.

"Eighteen North American oil companies filed for Chapter 11 bankruptcy protection in March and April alone, the most in a two-month period since oil prices began their slide in the summer of 2014. And it is likely to get worse, analysts said."

Those 18 companies had $9 billion in debt; in May it has gotten worse, with five companies with more than $2 billion debt each having filed.

  • Bloomberg News’ May 13 analysis pulls this forward: $55 billion in debt of shale bankrupts since the start of 2015; but that includes $11 billion in a week: Linn Energy, Chapparal Energy, Penn Virginia Corp. Moreover,

"At least four more oil and gas companies owing more than $8 billion are nearing default, including Breitburn Energy Partners LP and SandRidge Energy Inc. Bankruptcies have accelerated as cash-starved companies find it almost impossible to raise capital. Energy companies have been virtually shut out of the high-yield bond markets, banks are cutting credit lines and asset sales have slowed."

Then the great admission, late by about 10 years:

"’I don’t think the E&P model in North America is economic, and I don’t think it was really economic even at $80 and $100 oil,’ Jim Chanos, Kynikos Associates, [told ] Bloomberg TV."

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