It's been awhile, time for a blog post !
Oil's parabolic collapse continues. While many are negative on crude, particularly in light of the OPEC / Saudi mantra of "we won't cut production" no matter how low oil goes, to me, the drop seems to be vastly overdone ....
While the negative headlines continue to dominate, and high yield spreads widen to dangerous levels (despite almost all E&P companies having no debt or covenant issues at this time, and debt maturities out to 2018 or later), it seems to me the "glut" narrative is more than a bit disingenous.
Yes, there is oversupply in the market, yet worldwide demand is growing and expected to continue growing, and the crash in crude oil pricing is already resulting in supply responses.
Here are a few tidbits that support the idea that perhaps this crude oil crash has gone too far:
- U.S. E&P companies have been quick and proactive in announcing production budget cuts for 2015, and lowering supply growth expectations from U.S. shale, which will slow down materially. Spending on drilling in the Eagle Ford, Permian, Bakken, etc. will decline by 10s of Billions of $, if not more.
- Libyan oil has just gone largely offline due to the ongoing turmoil in that country; force majeure declared at its 2 main ports
- Nigerian oil workers are set to strike tomorrow (Monday 12/15) for an indefinite time.
It seems to me, that the above could have the effect of rather quickly addressing (at least in part) the modest oversupply concerns that the headlines harp on every day. To put it another way, while OPEC ministers (primarily Saudi, Kuwaiti and UAE keep saying "we won't cut"), the supply response in the US, plus sudden "outages" in the Mid East amount to production cuts. And as far as Mid East outages go, these could turn out to be their way of cutting, without actually saying that they are cutting. Whether we will start to see a slew of outages is clearly speculation on my part at this juncture, it is something to keep an eye on.
A couple of other interesting reads that counter the "crude oil is permanently impaired" hysteria can be found here:
Finally, U.S. Oil Production growth thanks to shale oil and other unconventional resources has made the US a top worldwide producer and on the way to energy independence. American ingenuity in this area has created the best high paying job growth seen in this 5 year "recovery". We should not be celebrating an oil crash that puts all of that in serious jeopardy. While consumers will benefit from lower prices at the pump, serious damage will accrue not just to the Energy Sector, but also to the entire economy and banking sectors if this episode devolves into a bust. That should not be allowed to happen.