Keeping up with the Clampetts

13 Dec

The Beverly Hillbillies was probably the original reality TV show. Much like the Kardashians, the Clampetts had very little discernible talent, other than the ability to extract crude oil via an errant shotgun blast.  Clearly the shale revolution that we have seen over the past several years has produced many Clampetts in places like North Dakota, Central Pennsylvania, Middle Texas, etc.. What we find most interesting about the explosion in domestic shale production is that this growth was fueled both by a mixture of technology as well as  cheap credit. There is little doubt that the exploitation of previously untapped reserves will go down as a game changer in  terms of domestic oil production and consumption. What is most interesting is that this unbridled growth was clearly aided and abetted by a capital market that was more than willing and able to fund all phases  of production and distribution (drilling, lease purchases, tankage, storage, processing, pipelines, etc..). While this is not interesting in and of itself ( capital markets always chase what is hot), we wonder if the price deck involved in such lending took into account the self-policing nature of markets. Did anyone think that domestic production increases on the scale that we have seen over the past 5 years would not have any effect on the global price of crude oil? Well as one would expect, markets are finally waking up to the possibility of a market in oversupply, particularly in the absence of any OPEC action. One can anticipate, as in all markets, that marginally high cost production will be shut in and that( in the absence of any demand shock) prices will settle in at levels which balance global supply and demand. So this is nothing more than free markets doing what they do. Thus one can discount the following:  fall is further evidence of end of the Commodity Super-cycle (never really existed), Black Swan event (hardly), China -driven demand destruction (not borne out by statistics).

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