The sharp decline in the price of oil has been the talk of the investment community over the past few months. Oil at $50 per barrel affects both macroeconomics (economic growth and inflation) and microeconomics (corporate activity). We’ve published numerous market notes on the subject as it relates to both challenges and opportunities for bond investors (http://snwam.com/blog/). In recent weeks, we’ve seen oil stabilize at near $50/barrel. Although daily volatility continues to be extreme, there is reason to believe we’ve found or are near a bottom. The marginal producer (United States) has been sharply cutting drilling activity. As reported by energy company Baker Hughes, the U.S. drilling rig count fell by 98 last week to 1,358, and is down 406 rigs year/year. This drop in drilling rigs is the steepest decline since data collection began in 1987. The emergence of the U.S. as a major oil producer has been both quick and extreme. Since 2008, the U.S. has increased daily oil production from 0.6mm to 4.7mm barrels a day. Without the U.S., world oil output would be lower today than it was in 2005. A sharp curtailment in U.S. supply will go a long way toward balancing the world’s supply/demand position, making the current price seem reasonable in the face of so much short-term volatility.
Source: Baker Hughes, Inc., Financial Times