The oil crash is at least somewhat due to all of the extra supply yielded by the US shale producers.
With prices falling, US drillers have been scaling back their operations in recent weeks. According to Baker Hughes on Friday, US drillers had 1,750 energy rigs in use, down from 1,811 the week prior.
Plunging oil prices is not a new phenomenon. We’ve had at least seven experiences in the past three decades.
However, Goldman Sachs notes the pace at which rig counts are declining today is more severe than what we’ve witnessed in previous oil bear markets.
The analysts attribute this to the evolving nature of the oil business.
“Unlike in the past, when the rebalancing took place primarily in the ‘physical’ and ‘paper’ markets, today the ‘capital’ markets are playing the dominant role,” they write. “Capital investments are now a new margin of adjustment — a direct result of the collapsed time lag shale has created between when capital is spent and when production rises, as well as producers’ ability, through very high decline rates, to quickly throttle back production when spending slows.”
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