U.S. Shale Producers Will Not Hold Down Oil Prices
Following a week full of potentially disheartening U.S. oil statistics, crude futures were well into the green Thursday afternoon as the dollar eased significantly by midday.
After crashing more than 4% Wednesday, West Texas Intermediate crude contracts for August delivery were up 1.8% to $45.57 by 1 p.m. EDT Thursday, while global benchmark Brent crude futures for September were up 2% to $47.20.
And the markets were gaining with crude Thursday as the Dow Jones Industrial Average was up 0.68% at 1 EDT, the S&P 500 climbed 0.45% and the Nasdaq rose 0.51%.
Still with somewhat bearish U.S. oil reports coming from both the Energy Information Administration (EIA) and the International Energy Agency (IEA) this week, and the Organization of Petroleum Exporting Countries (OPEC) calling for continued high levels of production, it appears the chances of commodities' return to the red are omnipresent.
Fears of a continued crude glut persisted Wednesday as the IEA said that while a market balance is upon us, "the existence of very high oil stocks is a threat to the recent stability of oil prices."
Meanwhile, the EIA reported that crude oil inventories declined just 2.5 million barrels last week, which is less than the 3-million-barrel decrease forecast by a weekly Reuters poll.
Such dire global outlooks often shift the focus to U.S. production, giving credit to concerns over the level at which U.S. exploration and production companies will meaningfully ramp up output, as too quick a return to the full-steam-ahead mentality could potentially throw a cyclical recovery off-balance.
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Oppenheimer senior energy strategist Fadel Gheit said the number 50 has been bandied about all too frequently by companies and industry followers as the mark at which many producers can pump oil and break even.
But what these sources don't explain is what they mean by $50 per barrel oil. That's because companies really have no idea as to when those prices will be sustainable, Gheit said.
"What [companies] mean is they will have to see oil prices above $50 for some period of time, say 3 months," he explained Thursday in an interview with TheStreet. "They want to believe it is here to stay. But there is no guarantee that it is."
WTI crude prices have broken $50 just one time in the past month, according to Bloomberg data, spending the majority of recent weeks in a downward trend.
According to Barclays analysts, there is cause for concern over an about face in U.S. output, however, as the firm believes rising cash flows and ample equity issuance may slow or even reverse the U.S. oil production decline over the next 12 months.
Barclays Thomas Driscoll wrote Thursday that the EIA's Short Term Energy Outlook released Tuesday suggests year-over-year U.S. crude production will reach decline rates of 1.4 million barrels of oil per day in September, but oil volumes will begin to register year-over-year gains by late 2017.
The firm anticipates that the rise in expected 2016 cash flows since budgets were set in the middle of the first quarter, combined with the amount of equity capital raised this year, could generate between 800,000 and 1 million barrels of oil per day---excluding natural gas and natural gas liquids---of incremental production once the money is put to work.
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"Balance sheets are 'healthy' again and we believe budgets are about to rise. E&P companies generally spend cash flow; we are not convinced it will differ this time," Driscoll said. "The industry delivered strong production and operating costs in [the first quarter] without increasing spending. We believe E&P companies may walk a fine line when addressing capital spending on [second quarter] calls---but companies are staffed and eager to raise spending."
Yet Gheit stressed Thursday that U.S. oil production has absolutely nowhere to go but down, as balance sheets really indicate the vast majority of U.S. producers are not making money at $50 oil, regardless of what they are telling you.
"The question is not if, but how much---the magnitude and duration," Gheit said. "We cannot print money. We cannot create imaginary barrels if you will."
According to the 30-year industry veteran, a lack of significant capital investment seen industry wide by major E&Ps will accelerate the decline rate, while improved technology and efficiency will mitigate some, but not all, of that decline.
Gheit admits that U.S. production has been more resilient than originally anticipated because industry followers didn't factor in the rush by U.S. companies to cut costs and become more efficient producers.
Nevertheless, a substantial decline will persist to return the supply-demand curve to balance, Gheit said, albeit at a lower rate than originally expected. And with it, prices will bounce back.