Rigs down, jobs down, energy production up, inventory overflowing

The commodities boom, followed by the QE liquidity boom, gushed capital at the oil and gas sector over the past decade. Technological advances have been huge and production has skyrocketed. That’s good news for supply. But it’s bad news for those counting on a price rebound any time soon. See: Exxon Mobil: Shale to the chief

The relentless rise in U.S. oil inventories continues. Indeed, tanks at Cushing—the big pipeline hub in Oklahoma—are two-thirds full already, according to Energy Department data released this week. Think of that as a giant bucket filling up above the heads of oil investors.

But there is an even bigger bucket out there: Big Oil.

…Exxon has been putting itself through shale class, learning “how to get the most out of these rocks in the most cost-efficient way.”

That represents a bearish trend that will weigh on oil prices for years to come. Exxon says its costs in the Bakken have dropped by 20% to 25%. So, many prospects that made sense at $100-a-barrel oil still make sense now, the company says.

This gives Exxon, along with its peers, a base of resources from which it can grow production profitably. That is even if, as now, lower oil prices force delays in advancing the big ticket, multiyear projects such as liquefied natural gas that the majors are usually known for. Indeed, roughly half the increase in output that Exxon targets by 2017 is expected to come from U.S. onshore wells.

It’s also bad news for the many highly indebted producers and related service providers who borrowed their brains out the past few years in the belief that prices had reached a ‘permanently high plateau’. The need for cash flow to service debt payments, will drive most to keep pumping and tendering on jobs even into bankruptcy. Highly levered players can’t operate at a loss forever. A need to shrink expenses is already causing cut backs in capital spending and workers. This morning’s February Challenger jobs report, confirmed these trends:

Employers announced 103,620 planned layoffs through the first two months of 2015, which is up 19 percent from the 86,942 job cuts recorded during the same period in 2014.

Once again, the energy sector saw the heaviest job cutting in February, with these firms announcing 16,339 job cuts, due primarily to oil prices.

Falling oil prices have been responsible for 39,621 job cuts, to date. That represents 38 percent of all recorded workforce reductions announced in the first two months of 2015. In February, 36 percent of all job cuts (18,299) were blamed on oil prices.

“Oil exploration and extraction companies, as well as the companies that supply them, are definitely feeling the impact of the lowest oil prices since 2009. These companies, while reluctant to completely shutter operations, are being forced to trim payrolls to contain costs,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

And so far much lower gas and oil prices have not led to the widely forecast pick up in consumer spending and retail sales:

“So far, falling oil prices have not resulted in higher retail spending. However, that is not necessarily the cause behind ongoing job cuts in retail. Falling oil prices might stave off job cuts for some retailers but, the fact is, some retailers are beyond the point where cheap oil will help turn things around. For example, the heaviest retail job cuts last month were the result of RadioShack’s long decline, which culminated in bankruptcy and liquidation,” said Challenger.”

Don’t look now, but real world fundamentals like supply, demand, debt levels, falling cash flow and rising unemployment are overwhelming central bank ‘control’ attempts once more.

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