The Shale Boom Has Already Gone Bust - At Least for Now

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Crude Production in the U.S. is Already Falling
U.S. Crude Production

The meteoric rise in U.S. oil production has ended, easing a global glut and driving a rebound in crude prices from below $50 a barrel, according to crude trader and hedge fund manager Andrew J. Hall.

“We have now reached a turning point,” Hall said in a letter Friday to investors in Astenbeck Capital Management LLC, his commodities hedge fund. Growing demand and supply pullbacks “rendered all the doomsday forecasts self-defeating.”

Oil production from Texas to North Dakota peaked at almost 10 million barrels a day in February and has been falling since then, Hall wrote. A drastic reduction in drilling rigs is starting to shrink U.S. oil output, according to government data cited by Hall.

That’s helped drive a 36 percent rally in the past six weeks, and prices will continue to rise because it will be harder for producers to ramp up than it was to cut back, Hall said in his letter. Lower crude prices have also boosted demand, while the risk of supply disruptions across the Middle East is growing amid sectarian tensions.

West Texas Intermediate, the U.S. benchmark crude, settled at $59.15 a barrel Friday, marking a 3.5 percent rise for the week. It fell 22 cents on Monday to $58.93 a barrel.

Astenbeck funds were up more than 10 percent through April, and gained 10 percent in 2014 even as oil fell by more than half, according to people familiar with its performance, who asked not to be identified because the information was not public.

$100 Million

Known for making aggressive bets on rising oil prices, Hall became renowned in 2009 after being paid about $100 million while at Citigroup Inc., a bank that received government assistance during the financial crisis. For more than two decades he led Phibro LLC, a commodities trading company bought from Citigroup by Occidental Petroleum Corp.

Phibro is in the process of being shuttered by Occidental. Hall separated from Phibro last year and is now exclusively focused on Astenbeck. Founded in 2010, Astenbeck manages a total of about $3 billion.

Hall’s production estimate is based on weekly data from the U.S. Energy Information Administration. The EIA’s numbers have been closely watched by the market for signs that a record pullback in the number of rigs drilling for oil since October has begun to reduce output.

The EIA has predicted that oil output from major shale plays would begin to decline in April. Total average daily U.S. production will peak this year in the second quarter before falling by 210,000 barrels in the third quarter, the agency said in a report last month.

Oil Adjustments

Hall says the EIA data is derived from estimates at state agencies that generally lags months behind, making it “essentially an artifice.”

A more accurate gauge of U.S. output is an “adjustment” the agency uses, which, in addition to the weekly number, adds up changes to how much oil is in storage, how much was used in refineries and how much was imported and exported, Hall said.

Paul Sankey, an energy analyst at Wolfe Research, also cited the trend in a report Thursday to investors. The amount of production that isn’t accounted for has fallen “dramatically” in the last two weeks, suggesting U.S. daily output may have fallen by as much as 200,000 to 300,000 barrels in April, he said.

“That number seems high to us, but it does support the notion that U.S. production is rolling over at present,” said Sankey, a former analyst at the Paris-based International Energy Agency.

Buy Hate

Imports, refinery demand and storage level data all come from surveys the EIA conducts with oil companies. Export data comes from the U.S. Census Bureau. Production data comes from a variety of sources, including state and federal regulatory agencies.

In a perfect world, the supply and disposition would equal each other, said Mike Conner, a petroleum analyst at the EIA. But they often don’t, so the EIA uses the adjustment figure to balance it out.

“All we really know for sure is the supply components are not enough to make up for the volume on the disposition side,” Conner said. “We don’t know if the error is in field production, imports, refinery inputs or what have you. Different analysts are going to have different interpretations.”

Hall, who said earlier this year that he planned to invest in the shares of U.S. shale producers, believing they would rally, said it is now better to bet on oil.

“Many years ago we were told by a veteran of the commodities business that the secret to making money was to ‘buy it when they hate it and sell it when they love it,’” he wrote. “We do not base our decisions on nostrums but there is a certain logic to this old saw. The market is forward-looking. If the consensus is universally bearish then that view will already be reflected in the price.”

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