One steady reader of mine has questioned my recent analysis: While being positive on oil up until the break below $82, I’ve now become one of the most negative in the space as oil nears $60. He wondered aloud to me whether I’ve lost perspective. But have I? Hardly.
One of the incredible attributes of this oil market is its ability to breed selling as it goes lower, precisely because it puts more and more of US and Canadian production at risk. How much at risk? Most of my pessimism on oil as it nears $60 a barrel is contained in the answer to that question and what I see as a major smoke job that’s being done by many of the smaller and mid-cap oil companies and the analysts that follow them. I say “There Will Be Blood” – and their distress is not being correctly measured yet.
Let’s take two interesting updates this week – Conoco Phillips (COP) updated with a capital expenditure slashing for 2015 of almost 40%, yet they are claiming that their production will increase by 7% next year. Oasis Petroleum (OAS), with production far more reliant on short-term capex than Conoco similarly updated by cutting their spending budget in half, yet still claiming to increase production by 10%.
Who’s zooming who? Production increases with cratered budgets? These claims and others inside the distressed oil sector just don’t jibe – capex and production growth is only one of them. You can see the self-deception…