The fracking industry has been a hard industry to follow for many investors, especially those focused entirely on investing in energy. What was quickly a boom in the United States has turned out to be on its way to be a fast bust. The boom was in part due to a low interest rate environment. Many of these new companies were able to secure easy financing and none of the lenders really cared because of how much money frackers were making. As oil has fallen to the mid $30 range the conditions that were once set in motion have changed drastically and are going to affect the future prospects of frackers everywhere.
It was announced by the International Energy Agency (IEA) that the over abundance of supply has outpaced the demand already by 1.5 million barrels on a daily basis, just starting from the start of this year. IEA went on record to say that the oil market could drown itself in its only supply. The question on everyone’s mind is just what happened?
The Overview of the Situation
In terms of the oversupply it is partly due to the frackers pumping out all of this U.S. crude oil into production, already doubling the amount produced in the past five years. Not only that but Saudi Arabia has been attempting to out maneuver U.S. frackers and get them out by flooding the market. In just Iraq alone the output was upped to 4 million barrels per day, something that is more than double their previous output for production. Libya increased as well followed by Iran getting out of their long sanctioned ties and looking to start producing oil again.
It was common knowledge over a year ago that in order to remain profitable, frackers needed oil prices to be at around $55 to $60 a barrel. It’s a wonder that any of these fracking companies are still even in existence with the absurd price drop as of late. Some of the reasons these companies are holding on have to do with frackers gaining new technology that is cutting costs and would allow them to profit on a minimum of $40 a barrel instead. That isn’t to say that some companies have been weeded out because that is still the case.
There is a dilemma at hand though. If prices to go back up then frackers are going to start producing more and then inadvertently drive the prices back down again. There is no way right now to justify the price increase since it comes down to basic economics and there is no increased demand right now. There have been large layoffs paired with bankruptcies and companies collapsing under the market pressure. If demand would somehow increase for some reason then there would be an argument for prices to reach the higher levels they once reached. There are a lot of factors that came into play that included China’s rapid growth and the Federal Reserve stimulus, both putting up the price of oil a few years ago.