We’re getting to the point now where something very bad is going to happen. Someone is losing his shirt in the oil markets right now. And the question is whether that somebody impacts the US oil sector and oil capital expenditures.
As I write this, WTI is quoted at $56.23 and Brent at $65.94. When I wrote about the bear market in crude five days ago, those numbers were $61.38 and $71.81 respectively. So, the selloff is accelerating here.
On Monday, people were encouraged when Saudi said it would cut production for December. But, let’s remember the rationale was that it was due to lower demand. Now, the Saudis said it was due to “lower seasonal demand”. But we know there is a wide-scale slowing in global growth. So this isn’t just a seasonal shortfall.
So what happens in the US?
US energy firms added 12 oil rigs to look for new reserves last week. That put the total rig count at 886, which is the highest level since March 2015, according to Baker Hughes. That’s about the time that oil prices had digested the initial cliff dive from over $100 a barrel in mid-2014. And a resurgence began to $60. Soon afterwards, it was clear that demand growth was not going to keep up with supply and the price was cut in half, down to $30 a barrel by the beginning of 2016.
Let’s remember that US crude production is already at a record 11.6 million barrels per day. The rig count tells you that will increase further still, before it declines. And that’s bearish for crude.
I think we are going to see crude remain under pressure. And eventually we will see rig counts and capital investment in the oil patch more generally get cut. That’s going to have a negative impact on growth numbers in the US in 2019.
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