Oil Prices Rise on Shale Deceleration


The collapse of oil prices late last year, coupled with shareholder pressure, has led to a slowdown in the US shale industry.

The EIA released new monthly data on March 29, which showed a decline in production of about 90,000 bpd between December and January, evidence that shale drills matched the declines after oil prices plummeted in the fourth quarter. The decline of 90,000 barrels came after an increase of 35,000 barrels per day in the previous month, which was the weakest increase in months.

But the US shale industry is facing more upside winds than just a temporary slump in oil prices. Stockholders have lost their patience with unprofitable perforations and are demanding returns, which is lowering prices in less competitive companies and forcing spending cuts across all sectors. Most troubling to the industry is a growing recognition of the "parent-child" problem – the unexpected poor performance of subsequent wells drilled in the vicinity of the parent's original well.

These obstacles are starting to pile up. Schlumberger and Halliburton, the two largest oil services companies, predicted that shale drillers will be forced to collectively cut spending by more than 10 percent this year.

The slowdown could put some upward pressure on the oil market, already suffering from disruptions in Venezuela, Iran and coordinated OPEC + cuts. While US inventories rose unexpectedly last week, much of the increase may be attributed to turmoil on the Houston Ship Channel after a major fire at a petrochemical facility.

In fact, some analysts see significant stock declines in the coming weeks. "The most visible stock levels in the world … will be victimized by a potent mix of disruptions to the Venezuelan supply, a chemical spill from the Houston Ship Channel and an increase in refining rounds," Barclays wrote in a note March 29. WTI rising to an average of $ 65 a barrel this year. Related: Trump Battles for Key Oil and Gas Projects

Adding to the moment of high is the sharp drop of 8 oil rigs last week, the sixth consecutive week of falls.

However, it is not guaranteed that the deceleration will last for long. Data company Kayrros says the decline in production will be "short-lived" and there are already signs that industrial activity has grown again in recent months. "This fall, which accompanies past seasonal behavior, follows a fall in well completions measured by Kayrros in December through a combination of satellite imagery and advanced processing," Kayrros wrote in a report. "But the same patented technologies show that the completions were recovered in January and February, foreshadowing a recovery in production." In fact, Kayrros says Permian's output may once again exceed expectations this year.

Still, the pause in the shale patch is feeding higher prices. "We expect Brent to go into the range of $ 70 to $ 80 a barrel," Giovanni Staunovo of UBS said, according to the Wall Street Journal. Related: Reuters: OPEC oil production falls to less since 2015

At the same time, other signs of tightness are abundant. A Reuters poll shows that OPEC output fell to the lowest level in four years in March, when Saudi Arabia cut below its demand and Venezuela recorded deeper losses in supply. OPEC produced 30.40 mb / d last month, a decline of 280,000 bpd from the previous month. Notably, Venezuela saw that 150,000 bpd went offline, a volume that will not be easily recovered.

Crucially, fears of an economic downturn have slackened recently. New data from China showed the largest monthly increase in the manufacturing purchasing managers index since 2012. The data has lessened concerns about China's imminent slowing. In addition, there is hope that US-China trade talks will lead to progress and tariff removal, which would eliminate one of the biggest negative risks to the oil market.

At the start of Monday's trading session, the WTI rose $ 61 a barrel and Brent rose to $ 69 a barrel. "Winning approx. 27%, Brent crude had the strongest start of the year since 2005 in the first quarter, "Commerzbank wrote in a note. Although the bank has warned that the price hike is somewhat limited, Brent's futures curve is assuming a bullish trend. "OPEC's production cuts are tightening supply on the world market. As a result, Brent's forward curve is in backwardation. "

By Nick Cunningham from Oilprice.com

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