What happens if oil stays under $50/bbl?

[dan_s]

From TPH Morning Notes - Dec 18

While media outlets remain focused on macro supply risk for crude oil post the conclusion of OPECs meeting in Vienna, investors feel far more concerned with demand in 2019. Specifically for crude, recent demand trends directionally pointing towards lower go forward growth (TPHe 1.2mmbopd in 2019) but as global recession concerns accelerate forecast could be drastically altered. Looking back over the last 20 years, crude demand grew 0.5% when looking at recessionary events/financial shocks (excluding the 2008 Great Recession). This would translate to a demand forecast closer to 500mbopd and would likely push WTI toward $45/bbl to force US supply into decline. With this context, it's hard to envision upstream clients stepping outside well capitalized large cap names that are moving toward cash flow neutral spending programs, irrespective of the commodity price (cashflow dictates growth and capex - not the inverse).

While the 2019 WTI curve is still hovering above $50 (if only just), the drop in price over the last two days is significant if it holds. Why? Industry will likely see harsher cuts to capital plans if WTI remains below $50 as the large caps, whose plans have largely remain unaltered in 2019 at $50+, will likely look to alter spending programs in a more meaningful way. Our model update, which ran strip at $53.54 WTI in 2019, saw y/y upstream capital down roughly ~3%, assuming limited cost inflation, which held large cap spending approximately flat while Small & Mid caps dropped ~8%. Under the assumption privates would likely mirror our small cap universe, total US growth slowed to 1MMbopd for oil e/e.
-----------------------
MY TAKE: The Wall Street Gang will not trust the OPEC+ group to cut production until they actually do it. My guess is that Saudi Arabia and UAE have already made significant export cuts. What we are dealing with now is the "Trump Effect". I voted for the guy because the alternative made my skin crawl, however his pressure on Saudi Arabia to ramp up production in anticipation of harsh sanction against Iran followed by the sanctions waivers is what caused this mess. Saudi Arabia and the rest of the OPEC Cartel members are now going to do what is in their best interest. That is cutting production and cutting it fast. The production cuts combined with U.S. refiners running at 95% utilization rates should result in a steady decline in OECD crude oil inventories. I agree with TPH that upstream companies will be trimming capex spending and 90% will promise to "live within cash flow" on their year-end conference calls. A prolonged period of oil under $50 will not be good for OPEC+ and they do have the ability to do something about it.
U.S. oil production growth will slow quickly if drilling budgets are cut way back.