While crude oil traders and stock markets fretted about the Fed inaction today, traders are now starting to worry about a drop in U.S. oil production. In the post fed moratorium the market was so worried about global growth that it is weighing on oil prices. Yet, the really big news should have been production destruction in the U.S. energy industry.
The Energy Information Administration is predicting that U.S. oil output will drop by 400,000 barrels per day, the biggest drop since 1989. This comes as U.S. rig counts tumble for the third week in a row. The oil rig count fell by 8 hitting only 644 rigs, according to Baker Hughes. The overall rig count fell by 10 last week, and that decline followed another in the prior week that wiped away all the additions made in August that oil bears were touting. While many are still focused on an oil glut we may start to see that go away as production in the United States. Also, some other producers are falling and OPEC is near capacity.
The Energy Information Administration also is warning about the financial condition of many oil producers. The EIA said that results from second-quarter 2015 financial statements of a number of U.S. companies with onshore oil operations suggest continued financial strain for some companies. Low oil prices have significantly reduced cash flow for U.S. oil producers, and to adjust to lower cash flows, companies have reduced capital expenditures and raised more cash from debt and equity.
With fixed debt repayments and the large reduction in cash from operations for these companies, the ratio of debt repayments to operating cash flow has increased recently. For the previous four quarters from July 1, 2014 to June 30, 2015, 83% of these companies' operating cash was being devoted to debt repayments, the highest since at least 2012.
Gas prices continue to fall. AAA says the national average is at $2.293. This comes as U.S. refiners are producing a record amount gasoline.