The price of oil at one time fell from $100 per barrel to $43 per barrel. Though prices have bounced back to $60 per barrel, investors in oil markets still have reason to be cautious.
In order to remain productive during the drop of oil prices, drillers have issued new debt and equity.This drop in oil prices has brought up a new bout of debt concerns. Bloomberg has reported that energy-related junk bonds have lost up to 3% of their value in the past couple of weeks.
Smart bond traders are now avoiding these high-yield, high-risk debts, and subsequently, yields have jumped to nearly 10 percent, a level normally associated with default risk, to accommodate.
“The energy sector of the high-yield market continues to be a silo of misery,” Margie Patel with Wells Capital Management, stated in a Bloomberg article. “If we stay near these levels, marginal high-cost producers won’t be able to survive.”
Energy XXI, for example, has bonds that are reportedly now trading at 84.5 cents on the dollar. SandRidge’s debt has reportedly fallen to 87 cents on the dollar.
When the second quarter earnings season comes around, shale companies will should shed some light on their financial struggles.Moving forward from here, the outlook is projected to be gloomy, much gloomier than the second quarter is expected to show.
Due to the nature of supply and demand, oil prices were unable to stay at the higher rate of $100 per barrel, demand has shrunk while supply has surged.
The turmoil in Greece and the Chinese stock market has had ramifications for those in the oil industry. “The Shanghai Composite has lost more than 30 percent of its value since June and the Shenzhen Composite has seen 40 percent of its value vanish into thin air,” according to a Yahoo Finance article, “While the precipitous decline raised worries at first and saw modest action from the government, the turmoil is quickly turning into a meltdown, sparking panic in China and around the world.”
Because China is the largest oil importer in the world, their economy has massive influence over prices. A sharp downturn could demolish oil prices even more.
The foregoing information, which is all publicly available, is being provided by The White Law Group. The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.
For more information on The White Law Group, visit www.whitesecuritieslaw.
