Yesterday, crude oil prices and risk asset markets were rocked by comments made by Saudi oil minister, Ali al-Naimi, in which he stated that, because no one would adhere to production cuts, discussing such a move would be a “waste of time” and described the prospects of a production freeze as a “joke.” Iran’s oil minister, Bijan Namdar Zanganeh, described the proposed Saudi-Russia production freeze proposal as “ridiculous.” That anyone became optimistic because of production freeze chatter is what is “ridiculous” and a “joke.”

It appears that pundits and money managers who are bullish on oil and believe that all OPEC need do is force U.S. shale producers into bankruptcy are either disingenuous or dull-witted. The former is shameful, but the latter is far worse, particularly for their clients. What is it that these bulls do not understand about the credit markets?

There is a belief (a mistaken belief in my opinion) that all OPEC and Russia have to do is force U.S. shale produces into bankruptcy and they will wrest control of oil prices. As I have written previously, bankruptcy does not automatically spell doom for U.S. shale oil production, it could make production profitable at lower price levels. Remember, an oil driller which seeks Chapter XI protection does not go out of business. However, they typically receive a significant reduction it their corporate debt loads. They also often renegotiate contracts with suppliers, logistics companies, etc. Forcing U.S. oil E&P companies into bankruptcy could result in making them more competitive. Chapter VII filings would result in companies seeking such protection ceasing operations. However, the survivors or new speculators would be able to buy the assets from the bankrupt companies at bargain prices. These assets might include equipment, rigs, wells, land and leases. Chapter VII could (should) result in profitable oil (and gas) production at lower price levels, as well.

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