Oil tumbles again as analysts start to throw in the towel

• The problem is simple: many analysts and strategists are still forecasting average oil prices of $60 this year. It is now abundantly clear that is not going to happen.
• The big issue is, when will supply come in line with demand? More specifically, when will the U.S. shale producers blink?

Oil took another tumble midday Wednesday, below $43 a barrel, and regardless of the reason we are finally starting to see analysts on the Street throw in the towel and begin to take down 2017 earnings estimates.

The problem is simple: many analysts and strategists are still forecasting average oil prices of $60 this year. It is now abundantly clear that is not going to happen.

So it's about time estimates started coming down. Today a raft of companies dropped ratings on oil companies:

1. Macquarie downgraded Chevron, Royal Dutch, Repsol, and British Petroleum;
2. Morgan Stanley downgraded Marathon Oil;
3. Seaport downgraded a pile of oilfield services stocks, including Halliburton, Baker Hughes, Nabors, Diamond Offshore, and Rowan, along with many exploration & production names like Concho, Devon, Apache, and Marathon Oil.

The big issue is, when will supply come in line with demand? More specifically, when will the U.S. shale producers blink? The prices at which companies break even on oil production varies greatly. Guys in the Permian basin can certainly make money at $45. Below that, the air gets more rarefied. Below $40, a lot of these guys are not going to make money.

Will this finally be the event that causes the shale producers to cut production? Maybe, but don't bet on it, at least not yet. One thing that has amazed me about the shale guys: If they have the money, they're going to spend it. They are not particularly good stewards of capital.

Piper Jaffray said they see no signs of a shutdown yet: "Overall, the mood from our E&P contacts was somewhat more reassuring, although not uniform, while our oil service contacts are nervous, though none have experienced any pullback in activity and none have been notified of potential equipment releases."

Stifel notes that we can expect significant reduction in the rig count (currently 747 rigs) once oil gets to $40 and below: at $40 a barrel, they estimate the industry would need to reduce rig counts by 200 to balance cash flows.

Seems like below $40 might be the magic shake-out level.