Take a Breath

With Brent falling below $90 / barrel, panic seems to be gripping the oil community, from the majors to the frackers. 

It's time for a bit of perspective. 

Start with supply.  Libya has added 550 kpbd of supply in just the last three months.  That's a 2 mbpd / year pace, plenty to tank prices without other considerations.  That country could still boost production by a similar amount over the next year in the better case (and there are worse cases, too), but once it puts capacity back on line, Libyan production will no longer depress oil prices.

On the unconventional  side, US shales and Canadian oil sands continue to power overall supply growth.  But keep in mind that the US independents were free cash flow negative at $105 WTI, and they're going to be even more negative at $84 / barrel.  If they can't fill the funding gap, they're going to have to slam on the breaks on E&P spending, and that should show up in production--or at least production growth--pretty fast. 

Also, keep in mind that the oil majors were struggling to hold capex at $110 Brent.  Capex compression is going to accelerate more rapidly at recent prices.  (And it's not coming back, by the way, even when oil prices do.)  We're going to see significant problems with conventional supply, and pretty soon.

Finally, Saudi Arabia might be sanguine about taking a $10 / barrel hit for 6 months, but a $25 / barrel price reduction over a year starts adding up to real money.   Saudi Arabia might talk a big game, but they're not going to sacrifice revenues forever just to prove a point.

So it's time to take a breath.  Oil prices will recover.  Indeed, a supply-constrained model suggests they could recover as fast as they've fallen.  For the oil majors, it's time to do some bargain hunting rather than hunkering down, a time to express confidence in the industry rather than fear its future.

On the other hand, for the deepwater oil field services sector, the Akers and TransOceans of the world, you had better get a very clear idea of the path of IOC capex.  The recovery in oil prices will not help you.