After the oil prices drop by 2%, the cost of Light Sweet Crude dipped below $60 per barrel for the first time since 2009. Rocky Mountain Resources CEO Chad Brownstein said that the price drop may continue all the way to around $40 per barrel, causing a Black Friday for large capital oil stocks.
Today, there are 18 times financial leverage in the market for every barrel of oil. There were only 3 times in 1997, and 13 times in 2007. The high leverage is caused by high-yield bonds and structured funds used by high capex oil company’s to fund their operations. Once the senior debt started to trade below a certain level, in this case .90 on the dollar reflective of less than $70 a barrel, the initial plans must be altered.
There will be companies that suffer from the loss of margin – or profit altogether – levered to $100+ per barrel oil price. These companies will most likely lower production or close down altogether. In terms of production numbers, however, there is a potential increase next year, with production being at around 9 million plus barrels a day in the US. The cost of production specific to oil services will also drop as smaller oil fields survive the storm.