Oil Prices Are Plunging Again—and Producers Are a Big Reason Why - TheStreet

NEW YORK (TheStreet) -- Oil companies here in the United States are in a bad spot, and it's going to get a lot worse before it gets better. Oil is headed down again and even worse than that, there's little reason to believe it will recover any time soon.

More important than the final bottom price for oil, whether that be $40, $30 or even $20, is the destructive nature that a depressed price for oil will have on the oil industry and the US economy at large.

At any price below $70, oil companies that have been a big part of the recovering US economy are going to start feeling the pain of unprofitable oil production. Most of that distress, unfortunately, has yet to be felt.

While some oil companies have proactively slashed some jobs, most of the shale oil producers have merely cut budgets and maintained their production levels. This is a band-aid measure that is designed to try and 'wait out' low oil prices and hope for a quick recovery.

But as oil companies have maintained production, the glut here in the US has continued to grow, now at a 30 day surplus, more than we've ever seen. 

Oil companies are still drilling wells but not completing them - so that oil is ready to come out of the ground as soon as the prices recover again. But both the maintenance of constant production and the promise of quickly ramping future production has worked in tandem to keep prices low.

The Catch-22 is that the 'tricks' that oil companies are using to wait out oil's low prices are working to keep oil prices cheap.

What needs to happen is that the backs of some of these oil companies necessarily need to be broken: hundreds of thousands of jobs need to be lost, not just a few thousand; companies will need to actually abandon promising well projects instead of holding them just ahead of completion; Bonds will need to start defaulting and several dozen oil companies will need to be restructured or go broke altogether.

Only then will real production and the potential of new instantaneous supply begin to slacken and allow oil prices to actually and sustainably rise.

That moment, however, is still many months away.

Until then, we'll see oil companies continue to 'mark time' as best as they're able, try to raise more capital where they can and hope that someone else goes broke first.

This is not a great recipe for success - and most of the blood we're going to see spilled in the oil sector still lies ahead.