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Line In The Sand For U.S. Shale Companies?

Line In The Sand For U.S. Shale Companies?

Crude Oil WTI NYMEX:CL1!

The price for crude has not only been lower longer than many analysts foreseen, but prices have been volatile. With the Crude VIX (a measure of crude price volatility) well above historical range, four to five percent price swings are almost common place.

The crude VIX (blue line) broke through multi-year highs as West Texas Intermediate crude fell through $65 per barrel. Volatility had been relativly mild and range bound as crude prices rose up from $80 per barrel in 2012 to just above $110 per barrel.

It has remained above 46 (very high reading) the entire year.

Earlier this week, I posted about how Canadian oil producers could be facing trouble. Analysts expect bank financing to be reduced by up to 20 percent in the coming months. This is troubling for companies starved of cash and need such financing to try and weather low crude prices.

I have also been very vocal in regards to troubled shale producers that are - by and large - cash poor and heavily levered into debt.

A line in the sand could be drawn for those who do and do not make the cut.

According to Dr. Ellen R. Wald, historian and scholar of global energy industry and Western involvement in the Middle East, U.S. shale companies could run into banking troubles, too.

Wald said that Wall Street financiers could look to call loans in (JP Morgan and Citi have over $100 billion in exposure). Due to federal regulations, these creditors have to re-evaluate the worth of the companies to which they loan twice a year: June and October.

With October around the corner and crude prices roughly $20 lower then in June, the value of these companies are likely to take a hit. Wald said if these loans are labeled "troubled," the bank must hold additional capital to cover any potential credit risk (that has only been growing).

(Wall Street burned by the Federal Reserve - again!)

A loan in "troubled" status will likely cut that company off from credit markets and banks are less likely to offer additional capital.

Shale companies can raise cash by selling assets or issuing additional equity, but it seems like last acts of desperation because nobody truly knows low long crude prices can remain at these levels.

Most shale executives thought crude prices would be $70, $80 per barrel by now as crude production declines.

U.S. crude production has declined some, but it still remains near historical levels while international production is increasing.

Even oil tycoon Boone Pickens has doubled-down on his $70 per barrel by year-end bet.

And with the U.S. business cycle reaching the tail end, and the potential for a U.S. recession in the next 6-8 months rising, nobody can determine that even if oil prices revisit $70 or $80 that it can stay there.

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