WTI futures: most active (Feb) $54.81 down $1.03
Natural Gas futures: most active (Feb) $3.044 -0.028
Energy Select Sector SPDR ETF(XLE) $79.88 down 0.25
SPDR S&P Oil & Gas Explore & Prod. ETF (XOP) $48.27 down 0.78
First Trust ISE-Revere Natural Gas ETF (FCG) $11.33 Down 0.22
One would think that plunging oil prices and the resulting mothballing (or bankruptcy) of the highest-cost domestic producers would lead to a collapse in US oil production. And sure enough, if looking simply at headline data like the Baker Hughes count of active rigs in the US, then US oil production grinding to a halt would be all but assured. However, what will actually happen, even as the highest-cost producers and those with the weakest balance sheets are taken to their local bankruptcy court, is that as Bloomberg reports, the US is - paradoxically - set to pump a 42-year high amount of oil in 2015 "as drillers ignore the recent decline in price, pointing them in the opposite direction."
Here is the surprise for all those thinking Saudi Arabia will declare a quick win when half of the US shale is bankrupt and supply plunges: U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells. That and the scramble to put competitors out of work, before competitors do just that to you.
On one hand oil companies are, logically, shutting down expensive production. However, in borrowing a page from the playbook of the iron ore producers who also are caught in an AMZNian race to the bottom, and are producing more raw materials than ever in hope of putting their competitors out of business as fast as possible, what they are also doing is shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp. the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.
In short, what the US energy industry will do at the national level, is precisely what OPEC did as an international cartel: battle plunging prices, and demand, with surge, if not record, production:
Everyone's hope: flood the market with as much cheap oil as possible to take out higher cost competitors, and remove supply as quickly as possible. The problem is that this is precisely what everyone else will also do, and in the biggest paradox of the crude price collapse, the near-term outcome will be an unprecedented surge in oil supply, which will lead to an even greater crash in prices before everything reverts back to a more stable equilibrium... at some point in the distant future....MORE“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”