As we await the latest directive from the upcoming OPEC meeting, one wonders who is really driving the bus when it comes to oil prices. The steep decline in price over the past several months was exacerbated by the unique reinstatement of Iranian sanctions alongside some fairly significant waivers with respect to crude exports. While the market was left wrong footed on this move, the Saudis have been mostly forced to keep their indignation in check lest they incur the wrath of the tweeter in chief. The question for the day is: Who controls the incremental barrel of crude, and thus has the greatest sway over price? A glance of the accompanying chart (U.S. High Yield Energy Index) might make one believe that the capital markets, with their incessant feeding of shale production, exert the greatest control over U.S. production and thus global oil pricing.
As you can see, the appetite for credit in the oil patch was waning heavily in late 2015/2016/. A spate of restructuring and some well publicized belt tightening gave the credit markets the confidence it needed to once again plunge head forth into shale. The key was that OPEC moves were not preeminent in determining U.S. production, credit was. The question now becomes: If we are experiencing a global glut of crude, will the risk appetite of the high yield market hold the key to how the U.S., and thus OPEC respond.