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July 20, 2018

China biggest corporate default in history and some thoughts on US production

China biggest corporate default in history and some thoughts on US production

EIA data is at odds.. with it’s own forecasts


US oil output has been stagnating for almost a month, what doesn’t stop US Energy department to anticipate production growth in the country.

The average daily crude oil production in the United States in June stalled at 10.9 million barrels per day. At the same time, according to the data of the same Energy Department, production in the seven main coastal fields of the country in June increased by 1.8% or 126 thousand barrels and amounted to 7.2 million barrels. In July, it is projected to increase by another 139 thousand barrels

It was thought that the Permian basin – main oil field in the country has transportation issues, as all pipelines are full of oil. But according to the estimates of the US Department of Energy, Premium basin was the driver for output growth in June, where production increased by 67 thousand barrels per day. In July and August, it is expected to show additional output gains of 72.9 and 73 thousand barrels per day, respectively.


Production in Permian Basin

Permian based production continues to rise – despite contradictory data


At the same time, US refineries have almost full capacity utilization, what means hubs are fulls and freshly extracted crude oil should go to exports.

There have been cases when the Ministry of Energy noticeably slashed its forecast and output numbers of the seven largest US fields. Therefore, it is likely that these figures will also be revised.

Also earlier, the department noted that the data is referred only to shale oil. Now this wording is excluded, and the Ministry reports both traditional and “shale” oil has been produced in the basins.

It’s embarrassing that the production in the US hasn’t change in the last month, but according to the forecast the United States has increased and will increase its production. It’s possible that in the near future EIA will either report about sharp increase in production or adjust forecasts to lower values.

One of China’s energy companies specializing in coal mining, Winline Energy Co., Ltd. went bust in the current month. The total debt of the firm estimated at 72.2 billion yuan or 10.8 billion dollars. Thus, the scope of corporate debt problems in China rose to a new record level. As it was announced yesterday, state banks will come to the rescue of Winline.


China biggest corporate default happened. What’s next?


The current year may be the worst for the debt market in China in history.

Against this background, the fall of the yuan continues against the dollar. The hope for rebound of the Chinese market rapidly wanes. For the period of February-July, the market erased retreated almost by 15% from its’ peaks.

In addition, since 2014, currency and gold reserves have ceased to grow in China, which can signal problems in the country’s economy and in the current financial model.



China FX reserves

China FX reserves rapidly declined following massive capital flight in 2015. Source:


There are special funds in China that on command of the government buy securities to support the stock market.

Also, the state is now carrying out a campaign to reduce the credit burden of enterprises and Winline case shows that the government helps large players in the market.

Given the size of China’s economy and the volume of loans issued, the snowball of corporate bond defaults can happen and the likelihood of this event is growing.

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