Recent price declines in North American oil and gas markets are challenging for Canadian producers but may present commercial and industrial energy consumers with a “tremendous opportunity”. This is the verdict of Mr. Stephen Schork, founder of the Pennsylvania based energy advisory firm, The Schork Group. He made the observations during a webinar presented by 360 Energy on May 14.
Schork told webinar attendees that American oil-producing companies need a sustained price of approximately $50/barrel ($US) to develop new production. He noted that rolling contract prices for West Texas Intermediate (WTI) on the NYMEX are currently trading in the vicinity of $25/bbl.
When surveyed by the Federal Reserve Bank of Dallas about the impact of a sustained price of $40/bbl, “15% of the executives of oil and gas companies indicated their firms would be out of business within the year”, Schork said. If prices remain at current levels, Schork said it would be reasonable to assume that nearly a third of producing companies could be gone by the end of 2020.
The dramatic fall in North American oil and gas prices presents a somewhat different situation for energy consumers. “If you are a consumer and you have the wherewithal to hedge, you ought to be locking up as much energy, as much natural gas, as much crude oil, as much petroleum product at these levels that you can maintain on your balance sheets”, Schork informed the audience. To offset these cash requirements, The Schork Group designs hedging programs that include the use off-balance sheet trade financing.
Schork’s observations came with a caveat. North America is in economic doldrums at the moment. Energy consuming companies may also be caught up in this upheaval. They may not have the financial capacity to take full advantage of energy price declines. He noted that consumer demand destruction has outpaced supply destruction – one of the main reasons prices have collapsed.
Schork expects U.S Bureau of Labor Statistics data will reveal that the contraction in American GDP in the first quarter of 2020 to be between 7 – 8%. “North America has entered a depression and will likely not see recovery for 2 – 3 years,” he said.
In The Schork Group’s research notes, Schork advises consumers to look for pricing inefficiencies further out along the term structure and to implement layered hedging programs.
The Stephen Schork webinar presentation can be viewed in its entirety [here].