Oil Zombies, living on a prayer (and a little hope)...

Interesting piece on Bloomberg.com today about "zombie oil companies," which are oil producers that have pursued various restructuring strategies with their creditors in hopes they can survive long enough for prices to turnaround.  The companies have engaged in "distressed exchanges":

Such exchanges — defined by Moody's Investors Service as when a troubled company offers its lenders new or restructured debt, securities, cash, or other assets, that amount to a smaller commitment than the original IOU — could have big implications for debt markets as they stretch out the current credit cycle and result in even greater losses for investors.

As noted in the article, in the current down cycle, investors have recovered on average a paltry 21% of the value of assets from bankrupt energy companies (versus an historical average of 59%).

Unfortunately, as the International Energy Agency stated today, they now believe it will take another year before markets balance out.  The future is not bright for these zombies. As I've noted previously, investors and firms are simply cutting off their nose to spite their face."  Extending the life of energy firms through these distressed exchanges means they will continue to pump oil to generate revenues, but this will also extend the low price environment.

Investors should've cut their losses when those assets were more valuable. The (market) force is not with them.  By allowing the zombies to survive a little longer, the supply shakeout is pushed further out; and speculators trying to time the bottom prevents prices from reaching a kill point. Instead, what we have is a bunch of slowly dying zombies living on a prayer for higher prices.  Whenever there is a bit of positive news (a decline in inventories for example), speculators push prices up too fast which gives everyone a little hope, but hope does not a trend make...

Steady Price of Crude

As I mentioned in my last post, I don't see oil prices moving to either extreme price predicted by two forecasters a couple months ago.  An article in Bloomberg here provides some support for my view. From the article:

All but one of 15 senior oil traders and executives interviewed this week at the annual Asia-Pacific Petroleum Conference in Singapore expect crude to remain between $40 and $60 a barrel over the next 12 months. Brent crude has traded in that range for the past five months.

The issue, as I've stated, is that commodity markets dominated by investors do not allow prices to fall low enough to generate the shake out needed to balance the market. Prices also tend to rise quickly enticing new production. So-called "savvy" investors are looking to time the bottom and ride the price rise up.  As one trader stated, the issue is that prices go up too fast, and this happens because of the herd mentality of Wall Street.

The current commodity deflation is a consequence of the bubble Wall Street promoted from 2002 to 2012, and most prices will be depressed for a long time because of the over-investment that occurred as a reaction to that bubble.  We consumers are getting some needed relief...