Debt Pile-Up to Fuel Further Oil Price Pressure

As regular readers are no doubt aware, a long-running theme here has been the vicious deflationary feedback loop inadvertently created by DM central bank policy. In the case of the heavily-indebted US shale complex it works like this: investors’ quest for yield in a world governed by ZIRP and NIRP drives demand for HY issuance which in turn allows otherwise insolvent drillers to keep drilling by tapping the debt market to stay afloat. Meanwhile, the very act of continuing to drill puts more pressure on prices, imperiling the companies even further and encouraging still more debt issuance, which leads to more drilling and so on and so forth. This is exacerbated by the fact that the more debt you take on, the more interest expense you incur, adding further incentive to drill, drill, drill. In short: the entire sector is digging itself a hole (no pun intended).