Summary

I’ve received a few questions offline from people noting they have seen headlines of energy producers reducing their capital expenditures (capex) or cutting them entirely in response to the lower prices, and wondering whether or not that is sufficient to balance the market, and if so, wondering if that means the coast is clear.

Oil markets are complex, and we’d need need pages to properly answer this good question. But we’re not making an oil call here. What we’re saying is A) cuts thus far have been insufficient for a decline in oil production; B) companies losing money and facing ballooning debt with breakeven economics well above current levels will not necessarily proactively cut their production as that would ensure their demise; they will act as options and hope for a turn, which when not achieved, may force them to shutter; we have not seen that; (C) When that happens, the market will rebalance, and that does not mean things are okay; what it means is that supply finally fell in response to a 30% demand decline (supply and demand rebalanced the hard way). We will then start to see the knock-on implications for other companies indirectly linked to oil, and it will likely not be benign. That’s the main point.

Oh, and along the way, we will not likely face a storage shortage because there will be a (painful) response. But that’s a distraction – the main point from the previous post, is that oil drives a significant portion of the US and without an active consumer, there is no offset to this massive pressure.

Observations and details