Plunging oil prices -- down more than 30% in the past year -- have been the primary contributing factor to the S&P 500's worst start of the year since 2009, with January clocking in a 5.1% decline. And with crude plunging below $30 again Tuesday, investors are still looking for clues as to when we'll see a bottom.
While oil's impact on the economy remains debated, the commodity is unquestionaingly affecting not only the indices but also a range of economic fundamentals from industrial production to earnings and credit.
Oil prices have been beaten down by weak economic data out of China, concerns about increased supply coming onto market -- including from Iran -- and a rising dollar. But some of the biggest pops -- and subsequent drops -- have been in response to (largely short-lived) rumors about production cuts by OPEC, and particularly Saudi Arabia, its de facto leader.
Just last week, crude saw a short-lived rally following quickly-discredited reports that Saudi Arabia and Russia might discuss a coordinated oil production cut. We saw a similar surge after production cut rumors surfaced ahead of the December OPEC meeting. But both times, it seems the Saudis are maintaining output levels.
Perhaps the real answer to sustained improvement in oil prices stands outside the realm of OPEC, which controls about one-third of the world's oil.
"Oil prices ought to be significantly higher a year from now even if there is no coordinated production cut by governments," says Raymond James analyst Pavel Malchonov.
In countries where the government doesn't control producing -- including the U.S., Brazil and Russia -- we are seeing companies adapting to the current oil price landscape by severely under-investing, Malchonov said, a phenomenon he terms "austerity on steroids."
And as this austerity plays out, non-OPEC oil supply is declining, which will prove to rebalance the market. "It's just a matter of time," according to Malchonov, who sees oil reaching at least $60 per barrel.
The tally: U.S. companies cutting production
Evidence of some of the company-induced supply cuts can be seen across recent oil and gas reports.
Last week oil-services giants Schlumberger (SLB) and Haliburton (HAL) said they planned significant capital expenditure decreases across their exploration and production customers.
"We still believe that the underlying balance of supply and demand continues to tighten, driven by solid growth in demand and by weakening supply, as the dramatic cuts in exploration and production are starting to take effect," said Schlumberger CEO Paal Kibsgaard on the company's conference call.
Halliburton Chairman and CEO David Lesar echoed those sentiments about supply. Given that third-party surveys have indicated a year-on-year decline in service spending of 30%-50% in 2016, on top of the estimated 40% drop in industry spending last year, Lesar expects a recovery. How soon depends on the timing and shape of non-OPEC decline rates. "We do expect that the longer it takes, the sharper the recovery will be," he said.
And while some of the most significant cuts are coming from smaller exploration and production companies with more levered balance sheets, we're also seeing significant cuts from major players.
BP (BP) reported a fourth earnings decline over 90% on Tuesday morning. Importantly, capital spending was $18.7 billion in 2015, significantly lower than its $24-$26 billion planned range and below the $23 billion spent in 2014. The company said it expects to spend $17 billion to $19 billion a year through 2017, but that range could decline if oil remains at current low levels, according to the company.
Exxon Mobil (XOM), whose Tuesday fourth-quarter beat was offset by strength in its refinery business, said it's cutting its spending by 25% this year to $23.2 billion, the lowest level since 2007.
Anadarko Petroleum (APC) on Monday said it anticipates recommending to its board an initial 2016 budget of $2.8 billion, a 50% drop from 2015.
Hess (HES), which offers some of the highest exposure to oil, especially through its Bakken shale exposure, last week cut its preliminary 2016 capital budget from October of between $2.9 biilion and $3.1 billion by an additional 20%, down to $2.5 billion. This represents a 40% cut relative to 2015 spending of $4 billion.
Also last week, Chevron (CVX) confirmed its 2017-2018 budget plan of $20 billion to $24 billion, a level that hasn't been seen since 2008-2010. The 2016 budget represents more than a 20% reduction from 2015 levels.
Demand picture
Meanwhile, the biggest source of concern on the demand side of the equation is China, where GDP growth has decelerated to under 7% following years in the double digits.
But last year, Chinese demand ended last year up 6% -- twice as much as what people expected at the beginning of year.
Malchonov said Chinese oil demand is poised to keep growing, which should boost the global demand picture, even if it's at a slower pace. It should also be noted that global oil demand is rising broadly -- albeit slowly -- from other emerging Asian economies and Europe.