Another Wednesday, another big build in domestic crude stocks, sending oil prices swooning again. Prices retreated another 3% to under $45 a barrel. Two majors, Hess (HES) and Royal Dutch Shell (RDS.A), reported some pretty bad numbers, proving that it's not only the small independents that are in deep trouble. The majors are hardly immune.
Royal Dutch is cutting $15 billion of capex over the next three years and freezing dividends, following ConocoPhillips (COP), first to the capex machete, dropping $2 billion off their spend in 2015 alone.
And don't get me started on Hess. Here's one where the Paul Singer magic hasn't worked out. The hedge fund genius is an activist holder in the old New Jersey-based company and had a hand in pushing for the many divestitures Hess has made over the last two years, including their entirety of refining and gas stations and Hetco trading company. Those cuts -- in order to concentrate on oil production, and particularly Bakken oil production -- are starting to make diversification look like a whole lot better oil strategy than it did a year ago. Defiantly, Hess has ramped up production in the fourth quarter anyway and is planning to make some serious stock buybacks. Clearly, the company is betting on a very quick rebound in oil prices.
There is a group hallucination going on, as it seems that everyone else is banking on one, too -- or praying for it.
With the increasing stockpiles as proof, slashing spends and cratering prices are doing nothing -- yet -- for production figures. Hell, even the Iraqis are now over 3.5 million barrels a day, competing for a bigger percentage of the OPEC market share. We're going to have to see production numbers drop -- a lot -- before this oil market even thinks about turning around. As we're still churning along on production contracted in 2014 and earlier when prices were blithely "stabilized" at $100 a barrel, that's not happening any time soon.
I'm convinced the market is going to have to beat the hallucination out of this group. And it will.
That means -- yes -- bankruptcies and defaults. That means restructurings and dividend cuts. And it means anybody early into this party, expecting to catch the bottom of this market before a lot more blood is spilled, is going to get garroted themselves.
You'll need to see all of that before this oil market begins to attract buyers again. We've barely seen any of it so far, save for a couple of minor refinancing deals by Linn Energy (LINE) and Southwestern (SWN).
That's just a preview. Since the start of this mess, all I've said is that an oil rally will be impossible to sustain. I've refrained from calling a bottom -- there is no upside in trying. But wherever oil trades down to, whether that's here or $40 or even lower, what you won't see is a quick turnaround -- until you see more blood. Brace.