Drill Baby Drill: Money Talks, but Rigs Walk – The Treadmill of Oil Production
“Drill baby Drill” It’s a lot of fun to say, and some people think it makes them look smart when they say it. But if you ask domestic producers, it really doesn’t make any sense. If their financial backers thought that they could make money by drilling, they’d be drilling…baby. It’s not about politics. It’s about the Benjamins. Last week, rigs counts fell sharply. Total oil rig counts declined, -11 to 575, now at the same levels as last year at this time. What’s scary is that 80% of the wells drilled last year basically replaced existing declining production and DUC well re-openings. We’re running on a treadmill, and the TV channels on the treadmill are stuck on the Drew Barrymore Show and the View. Even at prices over $70/barrel, it looks like people with money would rather spend it on their yachts and figurines these days. Almost every week this year has seen a decline in rig counts. Because of this, growth in the Permian is slowing to a crawl and a 2023 peak in total production there is starting to look more likely. Meanwhile, the much anticipated announcement of SPR replenishment did not cause much snorting among the oil bulls. The contango once again has re-emerged, exciting those looking for storage. It seems that what is really keeping a lid on oil prices these days is what is going on outside of the US. People still can’t figure out if China is in a recovery (or not) while global oil supplies are expected to be bolstered by increased production from Iran, Iraq and Venezuela. WTI traders closed the week at $71.55. with Brent rolling in at $75.58. At the end of the day, investors should be thinking that energy looks pretty cheap – with the stock market awarding it with a PE ratio of 6, compared to the S&P 500 PE ratio of 22. If you really want to be an oil bull, prices of extra virgin olive oil are at an all-time high. Pour it on some labneh and enjoy with pita bread.
Speaking of yummy, the flavor of the week is to talk about the debt ceiling. But if you ask The Tank Tiger, that’s about as exciting as giving pistachio ice cream to a toddler. It’s going to get resolved. At least the equity markets think so. The stock market found some real support last week, with the Nasdaq Composite climbing 3% for its best weekly showing since March. The 10-year Treasury yield jumped 23 basis points to 3.69%, a two-month high. Is it time to jump in? Over the last 100 years, be reminded that three out of five stocks have actually lost money. Even though the overall market has increased fabulously over that period, those gains have come from the other 40%. Yes, the winners always lead the way. Will everyone here kindly step to the rear? Like the Grail Knight said to Indiana Jones, “Choose wisely.”
