Economic Researcher: Bankruptcies, Defaults Coming in Oil Production Companies

Chris Martenson, an economic researcher and futurist specializing in energy and resource depletion, said that oil prices will need to move much higher before it is even close to the marginal cost of production for most operators. That would put WTI, which is currently trading near $61, well above $80.

Martenson pointed to when oil prices were much higher – in the 2010 to 2014 range – and said that oil producers were still burning cash. "They were spending $1.50 to get $1 in revenue," Martenson stated, with the promise that they would be able to capitalize on those investments in the future. "I think they need $100 to $110 oil to be break-even companies," Martenson projected.

This could be bad news for shale operators, like Whiting Petroleum Corp WLL, Goodrich Petroleum Corporation GDP and Anadarko Petroleum Corporation APC. Whether these companies decide to cut production or not, Martenson said that "if they are not constantly drilling, production will cut off." That's because a drill that produces 1 million barrels per day this year will only be able to produce around 350,000 barrels per day in three years, according to Martenson.

Martenson projected that there will be a "few bankruptcies" and some "junk bond defaults" in the coming years. Oil production companies are going to have to "contain costs and be smarter." As this shakes out, "we're going to discover that these shale plays were actually more expensive than we thought," Martenson added.

Oil prices are sharply higher today following comments out of Saudi Arabia. The United States Oil Fund LP USO is higher by 3.1 percent to $20.91.