Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

When it comes to the great rebalancing of the global oil market, Wednesday will not be remembered very fondly. In no particular order:

  • Oilfield services giant Halliburton, reporting second quarter results, said it believed the U.S. rig count had bottomed out. Chief executive David Lesar declared:

Today, our customers are thinking about growing their business again rather than being focused on survival.

  • Russia's energy minister told Reuters that the notion of coordinating supply cuts with OPEC was dead. (Remember the freeze? Good times.) The day before the interview was published, Goldman Sachs published a report forecasting Russian oil output by the end of 2018 to surpass the record set by the Soviet Union in 1987.
  • The chief executive of Saudi Aramco, the biggest oil producer in the world, told reporters low oil prices wouldn't stop the company from drilling for more or derail plans to sell shares in the company.
  • The latest set of weekly numbers from the Energy Information Administration showed that, despite a decrease in U.S. crude oil inventories, combined stocks of crude and refined products hit almost 1.39 billion barrels, the highest on record.
Glut Check
Commercial crude oil and product inventories are the highest since records began
Source: Energy Information Administration
Note: Excludes Strategic Petroleum Reserve.

What unites all these things? Competition.

The oil glut that has kept prices pretty firmly below $50 a barrel over the past year resulted from the U.S. shale boom and the reaction to it of competing producers such as Saudi Arabia and Russia.

In short, the fact that 5 million barrels per day of new output could materialize from the supposedly elderly U.S. oil patch in the space of six years upended old notions of organizations such as OPEC conserving supply in order to extract higher prices in the future.

The result is a war for market share, decidedly slushy hopes of a supply freeze, and those plans by Riyadh to cash in on Saudi Aramco somewhat sooner rather than later.

What is particularly fascinating about Halliburton's comments is that the company is calling a bottom on the decline in U.S. shale drilling despite oil remaining below $50. The reasons for that are manifold, ranging from the likes of Halliburton being squeezed on pricing by struggling E&P companies to more profound developments, such as the use of new techniques to raise productivity in shale fields and the dented but remarkably resilient ability of oil companies to keep raising capital.

To be clear, Halliburton isn't suggesting U.S. oil output is about to suddenly jump back to its pre-crisis levels. The damage wrought on equipment and crews won't disappear overnight; and, in any case, Halliburton believes a worldwide downturn in oil investment means a shortfall of oil supply is inevitable within the next five years, unless prices rise enough to encourage much more drilling.

On that score, Halliburton may be right. But that depends on demand for oil remaining robust, a notion undermined somewhat by recent developments in the markets for refined products such as gasoline.

Above all, the process of clearing the glut and rebalancing supply and demand in the global oil market will be dragged out further by the manifest desire of petro-states such as Saudi Arabia and, to a lesser degree, Russia to maximize output in the face of a U.S. industry that is still alive and kicking almost two years into this crash.

Rather than in America, the expectation of supply cuts leans increasingly toward pullbacks elsewhere. It is notable that, while the number of rigs drilling for oil in the U.S. has dropped by about 80 percent in the past two years, the decline elsewhere is a relatively modest 40 percent.

Offshore Drilling
Oil rigs have been taken out of operation much more rapidly in the U.S. than elsewhere
Source: Bloomberg, Baker Hughes

Investors should scrutinize results from Schlumberger, due Thursday, for more information on how well drilling is holding up outside the U.S. Beyond that -- and on a grimmer note -- the burden of rebalancing the oil market may well rest more heavily on those nations where low prices have ramifications far beyond trading screens. Keep a close eye on Venezuela and Nigeria.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net