The stall in the oil rally has occurred at the worst possible time for explorers. Banks have begun to reassess credit lines crucial to their growth.
This year’s credit reviews are due to start next month. This will arrive with the industry nursing a nasty case of whiplash in the oil rally.
A drop below $45 would likely spur credit-line reductions. This in turn would raise the specter of cuts that crippled drillers a year ago.
“The next month is going to be absolutely critical from an oil-price standpoint.” This according to Paul Grigel, a Denver-based analyst at Macquarie Capital USA, by telephone. “If you see prices retrench further, clearly the banks are going to have to re-evaluate. They are going to say, ‘Should we be pulling back?’”
On the other hand, if prices stay steady, there may be no change from the banks, according to Haynes & Boone’s Grahmann. It’s also possible oil could move back over $50 before the reassessments end. Even so, bankers would need “some kind of sign” that there’s long-term support for the increase.
The start of the year “was definitely not a good time for a price drop,” Grahmann said. “The pause that the market has taken recently has caused some bankers to be a little bit more cautious about assuming that every run-up will last.”