If shale is so good then why are the oil stocks so bad? Downgrades across the energy sector raise real questions about the ability of shale producers to operate with prices in the low $40s per barrel. It also questions the perception that shale operators have become so efficient that they can operate at almost any price. While the downgrades are coming fast and furious, it is probably a sign that the market has bottomed out. The sharp price drop will once again have ramifications for the trajectory of United States, and to a certain extent, global oil output.
Price crashes don’t help anybody. The booms and busts in the oil sector seem to be coming faster than ever and the cycles that we have seen in history and the recent sharp drop in price will impact investment and investment psyche. The oil companies that are fresh off divesting price collapses, will be quick to pull back until the bearish storms have subsided. Drillers that were adding rigs that were ordered when price was almost $10.00 higher are, in many cases, choosing not to complete them until prices turn around. That may take some of the best oil production from some of those wells as it may reduce the initial flush rate. This means that new wells may produce less oil than they would have if the wells were brought to completion right away.
The Dallas Fed, as reported by UPI, says that downside risks to the economy are sharply declining oil prices, continued strength in the dollar and uncertainty regarding both U.S. trade and tax policy. So, we should see a pullback in investment. New rigs will not be ordered and we should see more oil projects shelved. At least some are blaming the wild swings on the capital markets.
As reported by Investor Village Anadarko Petroleum CEO R. A. Walker had some advice to the capital markets. He said, "The biggest problem facing our industry today is you guys (cap investors). You do not reward capital efficiency, you reward growth. When you guys stop rewarding growth and reward and reward capital efficiency, guess what - the share price react, people will stop chasing growth for growths sake.” And they will stop adding rigs just to show they can do it and then crash and burn when the inevitable prices crash comes. You can’t lose money on every barrel and try to make up for it in volume.
OPEC is still doing its part as compliance to cuts are estimated to be close to 106%. Yet the market is still concerned about Libya and Nigeria output that is on the rise, at least until the next crises. Saudi Arabia suggests patience and is a little confused as to why the cuts are not working. The truth is they are working but not fast enough and surprisingly this price drop may play into the Saudis' hands as it will force the hand of U.S. shale producers that unwittingly will join production cuts this year as they have to pull back because of the oil price crash. Saudi oil imports to the U.S. will fall to a 30 year low just as U.S. production starts to ramp down.