A Couple of Notes on Oil

In a recent article I wrote that the fall in oil prices have already started to impact US oil companies, which have started to reduce their capex and shut down rigs. I would also like to make two more points about this issue:

Some companies have started to cut down production at least when we examine the rig counts in certain regions. Moreover, since off shore oil output is much more expensive than onshore, at least according to the EIA, oil producers are likely to reduce their offshore oil output.  It could take a while until this cut down will actually start to have a positive impact on oil prices. How long? Well, that’s the big question — perhaps a few months; during the summer, the driving season, when the demand for oil picks up and tends to pressure up oil prices. In any case the shift could be swift once the market relies there are more inventories and output is falling compared to the growth in demand.

The other point to consider is the longer ramifications on the oil market – currently oil producers are cutting down capex. And this could eventually bring down oil production growth down in the coming years.

So we could see higher oil prices in the near term and the impact of current low oil prices could have a lingering effect on the oil market for years to follow.

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