With the market enjoying its biggest three-day short-squeeze since 2011, one can be forgiven to forget, if only briefly, that nothing has been fixed. Furthermore, if the OPEC meetings of the past two days have demonstrated anything, it is to confirm that not only is OPEC finished as a cartel, but that OPEC has no power over the marginal oil producers in Texas, aside from bankrupting them by pressuring prices lower.
Which is precisely what it will do.
And going back to the original point of how nothing has been fixed, here is a chart from DB showing what will happen to the average oil and gas company net debt/EBITDA ratio if oil rises to and remains at $35/bbl.
Why is $35 important? Becase as a recent Wood MacKenzie study found, less than 4% of the world's oil supply is actually in the red at that price. Here's Platts:
Citing up-to-date analysis of production data and cash costs from over 10,000 oil fields, Wood Mac said it believes 3.4 million b/d, or less than 4% of global oil supply, is unprofitable at oil prices below $35/b.
Even the majority of US shale and tight oil, which has been under the spotlight due to higher-than-average production costs, only becomes cash negative at Brent prices "well-below" $30/b, according to the study.
This is what is sure to make the Saudis very frustrated:
Despite widespread fears of a major supply collapse, the US' shale oil output since late 2014, sharp deflation in service sector costs and greater drilling efficiencies have seen shale oil output remain more resilient to lower prices than first thought.
Wood Mac said falling production costs in the US over the last year have resulted in only 190,000 b/d being cash negative at a Brent price of $35/b.
The latest study contrasts with a similar report from the research group a year ago when it estimated that up to 1.5 million b/d of output -- focused in the US -- was vulnerable to being shut in at $40/b Brent.
At the time, US tight oil production was expected to start becoming cash negative a Brent oil price in the "high $30s."
"In the past year we have seen a significant lowering of production costs in the US, which has resulted in only 190,000 b/d being cash negative at a Brent price of $35," it said.
Last month, the International Energy Agency estimated that non-OPEC oil output will fall by 600,000 b/d this year, the biggest slide in almost 25 years, following gains of 1.4 million b/d in 2015 and 2.4 million b/d in 2014.
But even all of that is irrelevant if the fundamental flaw in the Saudi strategy is not addressed, a flaw we have pounded the table on for months, and one which the WSJ caught up with overnight, which reported that "Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production." Here's why:
The conundrum for many investors is that a slew of bankruptcies won’t necessarily shrink the global glut of crude. Companies need cash to repay their debts, so their existing wells are unlikely to stop operating throughout the bankruptcy process. In fact, those wells will probably be sold to better-financed buyers, who can afford to keep production going or even increase it.
Meanwhile, leverage ratios will only go higher as oil prices continue sliding lower, which also means that the market's post-squeeze hangover will be quite unpleasant.