Also at Play in Oil Rebound: American Wildcatters Show Restraint
November 15 2017 - 7:29AM
Dow Jones News
By Alison Sider
Oil traders and analysts have traced the market's recovery to
signs of tighter supply and a return of geopolitical tensions.
But many are also pointing to rising confidence that U.S. shale
producers won't endlessly ramp up production.
For the past three years, earnings reports from shale companies
often contributed to lower oil prices, as investors feared an
onslaught of output from wells would hit an already bloated
market.
Now, guidance from producers in Texas and North Dakota is
helping lift oil prices out of a trading range. Investors hope that
companies will be more disciplined about pumping for massive
volumes of oil, removing an overhang that has consistently weighed
on prices in recent years.
From mid-2014 through August, oil has tumbled by an average of
2.2% during earnings periods when U.S. producers touted the ability
to slash costs and deploy new technologies to produce more crude,
data from Barclays PLC and The Wall Street Journal show. But in the
most recent earnings season, oil prices rose more than 4%, data
compiled by the Journal show.
Companies are saying, "even if we get some upside in the
commodity, we're not going to plow that into the ground -- we're
going to remain disciplined." said Gordon Douthat, an analyst at
Wells Fargo.
Oil-market participants like the sound of that. A growing chorus
of investors are pushing shale companies to rein in spending, and
rising costs have made it harder for these companies to ramp up
quickly.
Marathon Oil Corp., for example, told investors this month that
it is making plans for next year based on oil prices of about $50.
Even if prices rise and the company finds itself with extra cash,
quick boosts to output won't be on the top of the to-do list, the
company said.
"It's going to come back to those high-level priorities,
starting with making sure that we protect and support an
investment-grade balance sheet through continued gross debt
reduction," Chief Executive Lee Tillman said on a call with
analysts.
If the producers take a more disciplined approach, they will be
less likely to react to short-term price increases, said
Christopher Burton, senior portfolio manager at Credit Suisse Asset
Management.
Oil prices had their biggest one-day tumble in over a month
Tuesday, falling 1.87% to $55.70 a barrel as the International
Energy Agency revised its demand forecast downward.
There are already indications that shale production isn't as
buoyant as some had expected. The number of rigs drilling for oil
has plateaued -- it stood at 738 rigs as of Friday, 30 fewer than
in August.
And rising costs could result in a more measured pace of growth.
Services companies like Halliburton Co. and Schlumberger Ltd. are
raising prices. Bottlenecks in availability of labor and equipment
are emerging.
Some investors say shale producers won't be able to fully take
advantage of oil's rise. Producers use longer-term contracts to
lock in prices, and those prices aren't rising as quickly as
near-term prices -- a market condition that often arises when
supplies tighten.
"It limits the hedging opportunity," said Terence Brennan, a
portfolio manager at Lazard Asset Management.
To be sure, shale companies are pumping more oil.
Even those companies that say they will rein in spending are
still projecting that production levels will rise. Parsley Energy,
one of the most prolific Permian drillers, has said it is planning
a "more measured development pace" next year and isn't putting more
rigs to work in the next six to eight months. Still, it anticipates
that its output will grow by as much as 50% in 2018.
Goldman Sachs analysts expect U.S. output will grow by 800,000
to 900,000 barrels a day if oil prices average $55 next year,
noting that companies are becoming more efficient -- producing more
oil with less spending -- and services costs haven't gone up enough
to slow down drilling. Perhaps most important, capital markets are
still open to these companies.
But others say that even if shale producers keep pumping, it
won't be enough of it to knock the oil market from its bullish
perch.
A group of 18 U.S. exploration and production companies reported
output about 1% higher than the end of last year, according to
Morgan Stanley -- "hardly the runaway growth that overwhelms the
oil market," the analysts noted.
And most companies have said they plan to keep capital spending
within operating cash flow, a target that will be hard to hit
unless oil prices rise significantly.
"If these intentions indeed stick, it will weigh on production
growth in 2018," the Morgan Stanley analysts said.
(END) Dow Jones Newswires
November 15, 2017 07:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Barclays (NYSE:BCS)
Historical Stock Chart
From Aug 2024 to Sep 2024
Barclays (NYSE:BCS)
Historical Stock Chart
From Sep 2023 to Sep 2024