Swing Oil Production and the Role of Credit: A Synthesis of Best-in-Class Research Views

Abstract

In order to understand swing production and the role of credit, this working paper will briefly cover the following five topics: (1) The paper begins with the classic definition of a swing producer and notes that North American shale producers would not normally fit this strict definition. (2) Next the article argues that advances in well-production estimation techniques naturally led to an explosion of creative financing solutions for investing in shale. As a result, the appetite of credit markets for taking on shale-production risk is now the key driver of the outlook for North American oil production. (3) The paper then proposes that we might be able to refer to shale producers as swing producers as long as we loosen the definition of swing producer to be one in which there are fairly uniform production decisions that take place over a 6-month to 12-month timeframe. And importantly, the outlook for this year’s U.S. oil production declines is likely key to whether global oil markets rebalance or not. (4) Next the article notes that while our short-term focus is properly on the credit cycle, at some point it may be that geological constraints will come back into play and the baton would thereby pass back to the Middle East Gulf oil producers as the undisputed swing producers. (5) Because the timing of the recovery of oil prices is so uncertain, the paper concludes that an investor should only express a bullish view on oil prices within the context of a balanced asset allocation.