On Wednesday, crude fell below $US81 a barrel, its lowest level since 2012 and more than 20% lower than it was this past summer when it was trading above $US105.
There are numerous possible reasons for and repercussions from this decline, but one sector of the market has really been taking it on the chin as crude has tumbled: oil drillers.
Almost the entire sector is in a bear market, or has seen stock prices fall at least 20%, over the last couple months.
Over the last quarter, some of the notable losers include Nabors, down 42%, Seadrill, down 40%, Whiting Petroleum, down 33%, Transocean, down 33%, Concho Resources, down 34%, and Hemerlich & Payne, down 32%.
And while these might not be megacap companies like ExxonMobil or Chevron, these aren’t microcaps either: all of the above companies have market caps above $US5 billion.
Here’s a chart showing the declines in each of these stocks, which has really been stunning.
And here’s the decline in crude oil that has really weighed on the sector.
There are a number of dynamics currently weighing on the oil market now, but analysts are largely centering their focus on two main triggers: excess supply and weak demand.
In a note to clients, Citi’s Ed Morse writes:
“Crude oil markets have moved rapidly into surplus, not because of the growth in new production from the US and other, but equally importantly because of the rapid collapse of demand. As a result, there is an emerging surplus that should weigh heavily on prices through next year.”
Morse writes that Saudi Arabia has currently signaled it has no intention to cut production in spite of this oversupply, which could make US shale the “balancer” to this supply.
He adds that US shale production could start to be affected around $US80, “but a noticeable drop in oil-directional drilling would require a much lower price.”
Citi analysts call the global oil environment a “game of chicken” scenario, and said that while OPEC — or, Organisation of the Petroleum Exporting Countries, an international oil cartel that includes Saudi Arabia, Iran, Kuwait, and Venezuela, among other nations — “has been dismissive” of shale production and its impact on global supply, “It is now paying close attention.
“The danger for [OPEC] is that they are underestimating the resilience of the US capital markets and overestimating the price at which cuts in capex and opex would be meaningful in the US, where much of the oil play is now based on half-cycle cost requirements that are largely at the level of $US45 per barrel or even below,” Citi writes.
But away from some of the larger political and economic dynamics weighing on the oil market right now, many traders are recalling the rout in oil prices that accompanied the 2000 bear market.
Stock market blogger The Fly has an aggressive way of presenting his arguments, he makes a succinct case that oil stocks haven’t seen the worst of their declines yet.
In a post on Tuesday, The Fly wrote that in 2000, oil fell all the way to $US10 before finally bottoming. And further, The Fly notes that if oil being exported by the Gulf States — basically OPEC members — is priced in dollars, then a dollar that has been strong against essentially all currencies is still hedging the nominal price declines in oil.
(The oversimplified maths would be: I price my oil in dollars, not my home currency. The price of oil falls 10% in dollar terms. But the dollar rises 10% against my home currency, so net-net, I’m neutral.)
And the damage in oil-related stocks isn’t just limited to the drillers.
Oil giants like Chevron, BP, Shell, and ExxonMobil (which is the second-largest company in the world), have seen huge declines in their stock prices over the last quarter. Exxon shares are down 11%, while Chevron, Shell, and BP are down more than 15%.
Ultimately, this is all very complicated.
Many would argue that away from any geopolitical or broader economic concerns, crude oil is simply a “broken chart,” where technical levels are being breached and traders are selling as they get stopped out of positions.
It’s clear that there are dozens of stocks that have seen huge price declines; it’s not clear is where the bottom might be.
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