Crude oil price momentum continues to gain and the stock market continues to gain momentum from a dovish Fed, the OPEC/non-Opec meeting and more signs that oil production might start to fall. It is clear that the massive oil price collapse in the month of January has created the environment for a long term sustainable rally. Rating agency Moody downgraded its outlook for the Saudi banking system on Wednesday.
The Fed's dovish move caused a big drop in the U.S. dollar, which is providing support for oil and other commodities as well. The drop in price also forced Saudi Arabia and Russia and the rest of the oil producers back to the table because they can’t take these prices. The pain is forcing oil producing countries to slash subsides and raise prices on food to try to make up for lost revenue.
Consider that Moody’s downgraded its outlook for the Saudi banking system on Wednesday. Qatar, the country that is going to host the historic OPEC /non-OPEC meeting in Doha, is expected to run its first budget deficit in 15 years in 2016. Kuwait is thinking about charging a corporate and personal tax for the first time in its history. Bahrain had to increase gasoline prices for the first time in more than 30 years and also cut subsidies on energy.
Oil companies are in trouble as well. The Wichita Eagle reports that two of Kansas’ largest oil and gas producers say they face the possibility of bankruptcy. Sandridge Energy (OTC:SDOC) of Oklahoma City, and Linn Energy (NASDAQ:LINE) of Houston, said in U.S. Securities and Exchange Commission filings this week that they are negotiating with bondholders to reduce their heavy debt loads. Linn Energy, which operates in several basins around the country, was ranked as Kansas’ top natural gas producer with a dominant stake in the Hugoton natural gas field in southwest Kansas.
We are seeing mergers and acquisitions as well. TransCanada Corporation (TO:TRP), the company behind Keystone XL oil pipeline project, agreed to buy Columbia Pipeline Group (NYSE:CPGX) Inc. for $10.2 billion. We will see more deals as companies struggle and have to sell.
Oil production is starting to fall. Blomberg News reported that U.S. crude production in February declined to a 16-month low as prices dropped to the lowest level in more than 12 years and spending cuts by drillers took hold. Producers nationwide pumped an average 9.11 million barrels of crude a day in February, down 3.6 percent from a year earlier, the American Petroleum Institute said Thursday in a monthly report.
Bloomberg also reported that oil explorers across North America have reduced spending and cut more than 100,000 workers to cope with the slump in prices. The number of active oil rigs in the U.S. dropped to 386 in the week ended Friday, the least since 2009, according to data compiled by Baker Hughes Inc. We'll get the Baker Hugs report today and look for another drop.
Natural gas is also moving up. Part of it is the return of winter in some forecasts but also sign that U.S. production will fall. Andrew Weissman of EBW AnalyticsGroup says that in their view the key factor driving prices higher is the market’s reaction to severe recent cuts in producer CapEx, which have started to drive up the price of the back-end of the natural gas twelve-month strip, supporting the front-end. A return to recent rock-bottom prices is no longer likely. He also points out that in the electricity market, natural gas has grabbed a 29.6% market share in the first two months of 2016, more than 10% above the previous high in 2012.