Why Oil’s Crash Will Cause A Shale Energy Bust

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Oil prices are collapsing, down more than 33% since early October.

As the price of WTI nears $50, this is a support level to watch. If it breaks, expect prices to hear much lower. The next two areas of resistance are $40 and $30.

The reason for the drop is fear that the risk of global recession is rising. This has investors worried that demand for the commodity will plummet.

This, along with the Fed raising interest rates, means that shale energy companies could be at risk of default. Shale oil wells go dry quicker than traditional wells meaning that new drilling is required. This is a capital intensive practice which is okay during very low interest rates. However, as rates increase, the cost of these capital expeditures gets more costly, at a time when revenues are decreasing due to lower prices.

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