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The Chilling Thing Devon Energy Just Said About the US Oil Glut
The Chilling Thing Devon Energy Just Said About the US Oil Glut
The oil-price plunge hit the industry when it was drunk on its own exuberance and awash in money. At the time, over-indebted junk-rated drillers had no trouble borrowing even more to drill more, efficiently or not. Dreadful IPOs flew off the shelf. Misbegotten spin-offs made Wall Street a ton of money. But in July, everything started to go awry. By October, it was clear that the oil-price plunge wasn’t a blip. By November, oil was in free fall.
Soaring production in the US, reaching 9.2 million barrels per day in January, and lackluster demand have caused US inventories to balloon. The “oil glut” was born.
So the industry adjusted by announcing waves of layoffs, whittling down operating costs, renegotiating prices with suppliers, and slashing capital expenditures. The number of rigs actively drilling for oil – a weekly gauge that indicates what’s going on in the oil field – has plummeted by 553 rigs, or 34%, since the peak in October. Never before has it plummeted this fast this far [The Fracking Bust Hits Home].
The crashing rig count was supposed to curtail production, and lower production would bring supply and demand into balance and allow the price of oil to recover. But the opposite is happening. And Devon Energy Corp. just told us why.
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Epsilon Theory – Salient Partners | The Unbearable Over-Determination of Oil
Epsilon Theory – Salient Partners | The Unbearable Over-Determination of Oil.
You know you’re in trouble when the Fed’s Narrative dominance of all things market-related shows up in the New York Times crossword puzzle, the Saturday uber-hard edition no less. It’s kinda funny, but then again it’s more sad than funny. Not a sign of a market top necessarily, but definitely a sign of a top in the overwhelming belief that central banks and their monetary policies determine market outcomes, what I call the Narrative of Central Bank Omnipotence.
There is a real world connected to markets, of course, a world of actual companies selling actual goods and services to actual people. And these real world attributes of good old fashioned economic supply and demand – the fundamentals, let’s call them – matter a great deal. Always have, always will. I don’t think they matter nearly as much during periods of global deleveraging and profound political fragmentation – an observation that holds true whether you’re talking about the 2010’s, the 1930’s, the 1870’s, or the 1470’s – but they do matter.
Unfortunately it’s not as simple as looking at some market outcome – the price of oil declining from $100/bbl to $70/bbl, say – and dividing up the outcome into some percentage of monetary policy-driven causes and some percentage of fundamental-driven causes. These market outcomes are always over-determined, which is a $10 word that means if you added up all of the likely causes and their likely percentage contribution to the outcome you would get a number way above 100%. Are recent oil price declines driven by the rising dollar (a monetary policy-driven cause) or by over-supply and global growth concerns (two fundamental-driven causes)? Answer: yes. I can make a case that either one of these “explanations” on its own can account for the entire $30 move. Put them together and I’ve “explained” the $30 move twice over. That’s not very satisfying or useful, of course, because it doesn’t help me anticipate what’s next. Should I be basing my risk assessment of global oil prices on an evaluation of monetary policy divergence and what this means for the US dollar? Or should I be basing my assessment on an evaluation of global supply and demand fundamentals? If both, how do I weight these competing explanations so that I don’t end up overweighting both, which (not to get too technical with this stuff) will have the effect of sharply increasing the volatility of my forward projections, even if I’m exactly right in the ratio of the relative contribution of the potential explanatory factors.
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