OPEC suffered a huge defeat in 2014, when it tried and miserably failed to drown American Frackers by flooding cheap oil in the market. Frackers resiliency surprised everyone, The Big Wall Street Banks at that time were sitting on a mountain of money. Despite the deep crash when oil plunged to $40, the bankers keep lending and Frackers keep drilling, in the low interest climate of 2014/2015 bankers had fewer opportunities to invest the huge piles of cash sitting on their balance sheet. The cheap money facilitated by the FED, by keeping the interest rates so low for such a long time helped launch the New Energy Revolution in America.
Today America is the #1 oil/gas producer in the world!
The Saudis and Russians admitted defeat and they figured they can’t beat the stubborn Frackers alone, so they joined forces, Russia started coordinating with OPEC cartel to lift the price of oil by reducing their output. Ironically, Frackers were the first to benefit from their coordinated campaign to reduce global oil supply. Frackers grabbed the opportunity and they went on a debt binge, and they accumulated huge debt which made the FED worry, and the FED started to clamp down.
Oil and Gas business requires huge upfront investment, however, Shale added a new twist to it- Fracking requires constant investment in new wells because the dry up fast, much faster than the conventional wells. For that reason, majority of shale producers never made any money, many went bankrupt, and the most of the remaining resilient Frakcers are heavily indebted, and the small producers are having a hard time raising new capital and investors are demanding return on capital.
The Result
The Oil & Gas Exploration & Production ETF is down 40% while the S&P 500 is at a record high. We think the current FED posture of not raising interest rates in the near future has given Frakers some breathing room, and if the Oil prices stay at $60 level, they certainly will retain The World’s Largest Oil Producer title a little longer!
Editor
