When OPEC agreed to cut production to help start reducing the global glut of crude oil, the markets cheered and prices started to stabilize around $50 a barrel.
But the decision also spurred U.S. shale-oil producers to start drilling again, and drilling they have been. Data from Baker Hughes showed that at the beginning of April, the U.S. oil rig count rose 683 units. This is the highest level since April 2015, according to Commerzbank.
While the International Energy Agency estimates the global crude market is close to balance, the IEA, OPEC and the U.S. Energy Information Administration raised non-OPEC supply estimates due to growth in U.S. shale output.
After finally rebounding from a disastrous few years when oil prices sank to sub-$30 a barrel, the oil industry is starting to make money again.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
Some oil industry executives are concerned this new supply will add to the troubles the oil patch has faced for the past few years — too much product overwhelming demand. Even shale-oil pioneer Harold Hamm, director of Continental Resources, fretted recently that U.S. output is expanding too sharply.
So far, oil prices this year have ping-ponged between about $47 and $57 a barrel, always adjusting based on the latest supply outlooks. Despite the concerns, others in the industry say those fears are overblown, especially if demand continues to grow.
Scott Roberts, head of the high-yield team for Invesco Fixed Income in Atlanta, says part of the worries came when U.S. inventory levels rose in late winter-early spring.
But the rise in supply was due to the seasonal refinery maintenance that’s normally done in March until early April. “They cut their crude runs, they process less, so they buy less oil,” Roberts says. “So you see storage seasonally grow.”
Instead, he says, investors need to look at product demand, which has been robust.
“That is the biggest takeaway,” Roberts says. “We’re seeing above-seasonal demand for gas, diesel and jet fuel. That speaks to overall strength in the economy.”
Jay Hatfield, New York-based co-founder and president of InfraCap and portfolio manager of the InfraCap MLP exchange-traded fund (ticker: AMZA), says energy demand is usually lower in winter and increases as temperatures warm up.
“Demand for oil is driven by gasoline,” Hatfield says. “During the summer driving season [the inventories will] be burned down.”
Roberts understands the source of Hamm’s concerns, especially as oil producers are outlining larger capital expenditures this year.
“I think Harold is correct in pointing it out,” Roberts says. “His bias is, he’d rather his competitors lay down their rigs and he pumps oil. His concern is that capex spending budgets will increase too much, that there will be a lot of more rigs.”
Brian Kessens, managing director and portfolio manager at Tortoise Capital Advisors in Leawood, Kansas, says oil companies are able to access the equity and debt markets, which is different from a few years ago and allowing the increase in capital expenditure spending.
[See: The Best Energy Stocks to Buy for 2017.]
Kessens says U.S. oil production ended 2016 at 8.8 million barrels a day, and he’s forecasting that by the end of 2017 output will be at 9.4 million barrels, very close to the peak U.S. production of 9.5 million barrels daily. That’s in line with the Energy Department’s 2017 forecast of 9.2 million barrels. In 2018, the agency sees output at 9.9 million barrels.
All of this comes just ahead of the May 25 OPEC meeting. Kessens says it’s likely OPEC members will conclude production cuts and price stability is headed in the right direction.
There may be some “threat to not to continue to cut or not to comply, but that’s all just designed to hold one another in check to keep their compliance as high as possible,” he says.
And Saudi Arabia wants to see stable, if not, firmer prices as the country prepares for its massive initial public offering of a small part of the state-owned oil firm, Saudi Armaco, Kessens says. The IPO may come sometime between late 2018 or 2019.
“If they want to successfully IPO that business, they want oil prices above $50 a barrel, so they have an incentive to keep production in line to keep prices above $50,” Kessens says.
The Saudi Armaco IPO could be as much as $2 trillion, according to published reports, and Roberts says it would be the IPO of the year. “They need oil prices high, but not too high,” he says. “That encourages all the U.S. shale guys to massively add capacity. There’s a balancing act in here, to find what is that level.”
Global oil demand currently is about 98 million barrels a day, and generally demand grows at about 1 million barrels a day annually, barring recessions, Roberts says. Even with U.S. output growing in the face of OPEC cuts, crude oil prices may be higher toward year’s end, Roberts, Kessens and Hatfield say.
All three see prices higher, pushing closer to $60 a barrel by year’s end, with Hatfield suggesting prices could even go to $70.
Roberts says the Saudis, OPEC and American shale producers “will be happy” with $60.
[Read: ETFs for Nervous Energy Investors.]
“Then you can ask those questions, is this encouraging too much aggressive behavior by companies?” he adds. “The market is not going to know that answer until the third or fourth quarter of this year.”
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Will Shale Keep the Lid on Oil Prices? originally appeared on usnews.com
