Oil Bears Are Back as Prices Fall and Driller Shares Take a HitBy and
U.S. shale production has investors, traders pulling back
Faith in OPEC’s ability to drain glut with cuts is receding
Shale producers risk drowning in their own surplus -- again.
On Tuesday, oil slid into its first bear market in 10 months, falling 21 percent from its high for the year. The swoon dragged down driller shares amid concern that unceasing production from U.S. shale fields is overwhelming OPEC efforts to ease a global supply glut.
Explorers who came of age at a time when ever-increasing production was rewarded with ever-higher prices are now having a bit of a déjà vu from their fall from grace in 2014.
The S&P 500 Energy Index has lost 14 percent this year, while West Texas Intermediate crude, the U.S. benchmark, has fallen 19 percent. Buoyed by prices that hit $54.45 a barrel in February, U.S. explorers have boosted the number of rigs drilling for oil to the highest since mid-2015, and expanded their production to 9.33 million barrels a day.
“A lot of faith and hope and belief was put into” the deal by OPEC, Russia and other exporters to cut their production as a way to balance the market, said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. But “it’s proven ineffectual.”
The Organization of Petroleum Exporting Countries failed to impress investors with a deal to extend output curbs in May as it didn’t include deeper cuts, additional allies or an exit plan for when the limits expire in March. American supplies of crude and fuel that remain high even as the summer driving season kicks in are proving the skeptics right.
Crude futures declined 2.2 percent in New York on Tuesday, closing at $43.23 a barrel, the lowest since mid-September.
A report on a decline in American inventories wasn’t enough to improve the mood. While the industry-funded American Petroleum Institute was said to report that U.S. crude stockpiles fell by 2.72 million barrels last week, gasoline supplies rose by 346,000 barrels. The U.S. Energy Information Administration is set to report government data on Wednesday.
If we don’t see a crude draw in this week’s U.S. inventory report, “we’ll probably start kissing $40 pretty quick,” James Williams, an economist at London, Arkansas-based energy-research firm WTRG Economics, said in a telephone interview.
Brent for August settlement, meanwhile, slipped 89 cents to settle at $46.02 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $2.51 to August WTI.
“People are getting a little fatigued waiting for the production cuts to have effect,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. Traders are “very nervous about the near-term prospects.”
Another factor feeding trader angst is a rise in the number of drilled-but-uncompleted wells in U.S. oilfields. At the end of May, there were 5,946 wells in this category, the most in at least three years, according to estimates by the EIA. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open, meaning production could surge when they turn on the spigots.
“We still have a lot of oil,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by telephone. “Libya is coming on a little bit more than people expected. And the bottom line is that the glut that’s here in the United States doesn’t look to be” slowing anytime soon, he said.