Pain and Gains
How much pain can oil producers take? Even as OPEC production hit at least a 20-year high climbing to 33.113 million barrels a day, there are signs that OPEC may be ready to cry uncle. While rumors of an OPEC/ non-OPEC summit are being downplayed, at this point it as clear that oil producers can’t take much more pain. Saudi Arabia seemingly continues to take a hard line but it is clear that these crashing prices are becoming a problem. Not only are they warning about big austerity and spending cuts, their banking stocks are hitting decade lows. Nigeria is also in big trouble as President Muhammadu Buhari of Nigeria asks the World Bank for a 3.5-billion-dollar emergency loan. Of course if the World Bank bails out Nigeria, will Venezuela be next?
The crude oil market also has to try to get a handle on supply and demand. We know U.S. oil producers are shutting down rigs. Baker Hughes reported that rigs targeted oil fell by 12, bringing the total rig count below 500 for the first time since March of 2010. Rigs targeting natural gas fell by six to 121, the lowest count in Baker Hughes records stretching back to 1987. American oil and gas producers are expected to announce 2015 losses totaling over $15 billion, according to Bloomberg based on recent data. Oil companies across the board are getting crushed and they can’t keep it up.
Yet there are also demand fears. Oil dropped after China's factory orders fell to a three-year low. The January manufacturing purchasing manager's index (PMI) came in at 49.4, slightly below estimates for a 49.6, the weakest reading since 2012 and it was the sixth straight month that it was lower.
Despite record oil imports and strong Chinese auto sales there are fears that warm weather in China and slumping manufacturing will slow Chinese oil demand.
On top of that, weak oil prices are causing big problems in oil producing countries and making it hard to believe that the talk of restraint may not have at least some substance.