If oil projects are underwater, how long can executives hold their breath?

Oil capex is down, but not as much as most would have imagined 8 months ago given that crude prices have more-than halved. It means production continues to far exceed global demand and it's awfully tough to see a path for higher prices.

The oil market is facing two scenarios and neither of them are pretty.

1) That companies/countries are hurting but still fighting for market share

Production isn't shutting down and instead companies are trying to pare costs and are scaling back long-term projects but nothing due in the next 2-3 years. However, if current projects aren't paying the bills then it means those companies are losing cash with no way to replace it at current prices. It's just a matter of time until they shut down and then supply-demand will return to balance.

This is getting harder to believe. Last week, Exxon cut capex by just 12% from $38.5B to $34B but still said it plans to increase daily production this year by 2% and 3% per year in 2016 and 2017.

2) Companies are still making money, just less of it

That's the worst-case scenario for oil prices. Companies with obligations or cash flow problems will squeeze everything out of current projects to pay the bills. This is looking more and more likely. Citi was out with a weekend report saying tight oil (shale) breakeven prices are around $25. Exxon CEO Rex Tillerson has conceded that US production has been more resilient than expected.

From the Citi report, the highest-price oil they see is Canadian oil sands at around $40 but even there, that's the all-in cost, not the operating cost. Most of the investment is already done and the projects have 50-year lives at lower operating costs so it's difficult to imagine shut downs of existing production and anything that was 2-3 years away will almost-certainly proceed. At the same time, the drop in the Canadian dollar means a 25% discount on many costs, including labor.

Oil outlook

I'm getting more bearish on oil and it looks like another washout is coming. The market is massively oversupplied and there's no fresh demand coming. Stockpiles are overwhelmed and it's only a matter of time until it's dumped on the market. Production continues to rise in the US and elsewhere. This doesn't even consider the idled capacity in a place like Libya, which will be pumping an additional 1.5mbpd if/when the political situation stabilizes.

Traders are less optimistic about a rebound as well. The CFTC net long position was down 19% in data reported Friday for the week ending March 3.

The oil chart at the moment looks a lot like the euro chart did two weeks ago. There has been a period of stabilization but no real bounce after a swift drop. A quick fall to the downside is more and more likely.

WTI crude daily