It’s been clear for years that excessive and prolonged central bank accommodation has paradoxically served to create a disinflationary impulse in some sectors of the economy.
Nowhere is this more readily apparent than in the US energy complex. Otherwise, insolvent production was allowed to effectively hibernate – as opposed to going out of business – during the downturn in oil prices thanks to wide open capital markets.
With investors starving for any semblance of yield, markets remained open to companies that would, under normal circumstances, have lost access. Poor balance sheet discipline was rewarded rather than punished and far from being purged, misallocated capital became even more misallocated in a kind of reverse-Schumpeter dynamic that reemerged with a vengeance following the OPEC cuts late last year.
Investors and Wall Street threw money at US operators during H1 and indeed, the bonanza recently reached such a fever pitch that Anadarko boss Al Walker characterized his own industry as a gang of out-of-control alcoholics that need an intervention if they’re to be weaned off the easy money morphine drip.
In June, supply finally dried up, but it wasn’t obvious whether that was attributable to widening spreads, or whether it was simply a byproduct of producers not needing to refinance:
(Goldman)
Even when you consider that the recent move lower in crude was accompanied by higher HY Energy spreads, the bond market still isn’t sending a strong enough message.
“We believe this may not send a requisite message to rein in drilling activity for all producers,” Goldman wrote, in a note out earlier this month, adding that “on the flip side, it sends a theoretical message for producers to issue more debt.”
Of course, this raises significant questions about the viability of these firms in a rising rates environment – especially if oil prices can’t manage to sustain a meaningful bounce.
