Background -
- Oil has been one of top commodities in repo trade aftermath of the financial crisis as central bankers' slashed the system with liquidity along with ultra-low interest rate.
- For three consecutive years average price of oil remained the highest in history. These factors moved producers to bring forth future supplies to benefit from higher spot prices.
- Producers across world, invested heavily in oil assets and in new production. This resulted in lots of debt accumulation.
Why they keep pumping?
- After math of the 50% drop in crude prices, even if margins are a maintained lower revenue will invariably will result in lower bottom line and lower level of cash.
- So to service these debts, companies across world need cash.
- Closing down operation doesn't bear well for the ratings, companies' stock price. So they will continue production even at break even. After closing down a project, start over is a cost incurring event, so real options are involved in the decision making to close down.
- Moreover oil market is moving in contango; so it makes sense to produce and sell them at future.
Supply glut may continue to persist in spite of fall in oil price. Increased demand would be more price supportive the supply side. WTI is trading at $42.23/barrel, down 2.8% today.
