U.S. Shale Kills Off the Oil Price Rally

Shocking level of bullishness by hedge funds, then prices plunged.

By Nick Cunningham, Oilprice.com:

Oil prices plunged on Wednesday and Thursday, dropping to their lowest levels since December when the optimism surrounding the OPEC deal was just getting underway. WTI dipped below $50 for the first time in 2017 on March 9, a two-day loss of more than 8 percent.

The catalyst for the sudden decline in prices was yet another remarkably bearish report from the EIA, which showed an uptick in crude oil inventories by 8.2 million barrels last week. That takes crude stocks to another record high, and it was the ninth consecutive week of inventory builds.

Up until now, oil speculators have taken the unusual increase in crude inventories in stride. Instead of paring back their long positions, hedge funds and other money managers doubled down over the past two months, putting more money into bullish bets, hoping that the OPEC production cuts would outweigh the comeback in U.S. shale.

The result was a shocking level of bullish bets on WTI and Brent, creating a lop-sided position in the futures market. That is not necessarily a problem if market conditions are tightening, as many investors believed, but it begins to look unbalanced if in fact the oil market is still oversupplied.

The pace of adjustment in the physical market for crude oil is starting to drag on, and investors are getting anxious. With so many investors having staked out bullish bets, oil prices are exposed to sharp and sudden corrections if they unwind those positions.

And that may be starting to occur. It was just a matter of time before sentiment shifted, and another week of enormous crude inventory builds might have been a too much to stomach. “When you look at a very visible marker like the weekly U.S. inventories and you see that crude stocks are still rising, then some of these market participants may begin losing a bit of faith in the effectiveness of producer restraint,” Harry Tchilinguirian, head of commodity strategy at BNP Paribas SA, told the WSJ.

The sudden downward shift in WTI below $50 per barrel also suggests that the U.S. shale industry might be ramping up too quickly. This week Continental Resources CEO Harold Hamm warned at the CERAWeek Conference that shale drillers might crush oil prices if spending and production move too high too fast. Noting that shale production could “go pretty high,” Hamm warned that “it’s going to have to be done in a measured way, or else we kill the market.”

Saudi Arabia’s energy minister also warned industry participants at the Houston Conference that his country would not bail out shale drillers if such a situation occurred. It would be “wishful thinking” to expect that Saudi Arabia and OPEC “will underwrite the investments of others at our own expense” by slashing production further, Saudi energy minister Khalid al-Falih said.

The fact that U.S. crude inventories are breaking records every week and oil prices have failed to post any gains so far in 2017 offers some evidence into the notion that the comeback in the U.S. oil industry is undermining the effectiveness of the OPEC deal. OPEC has achieved a much higher compliance rate than the market expected, posting steep cuts in output, yet the market fundamentals are improving at a much slower pace than everyone anticipated. That largely is the result of the sharp uptick in U.S. output, now up nearly 600,000 bpd since last summer.

In the most recent data release alone, the EIA reported an uptick in production by about 56,000 bpd, a large jump for a single week. Production is now up to 9.088 million barrels per day, the highest level in over a year.

And the pace of growth is surprising the market. “Since the start of 2017 the average U.S. crude oil production growth has been +35 kb/d w/w. That equates to a marginal, annualized growth rate of 1.8 mb/d,” Bjarne Schieldrop, chief commodities analyst at SEB, the leading Nordic corporate bank, said in a statement. That amount of growth is “too much, too early.”

Oil traders have been optimistic regarding prices for several months now, betting that OPEC would accelerate the adjustment towards balance. But the sharp rise in U.S. production is deflating the rally. Schieldrop went on to sum up the predicament for OPEC: “[W]hat will OPEC do in the face of strongly rising US crude oil production? They can decide to make cuts in H2 2017, but does this make sense? We don’t think so. The U.S. shale oil production response is too fast and too flexible.” If OPEC feels that cutting back is futile, they could pass on a six-month extension. That would certainly mean more losses for WTI and Brent are ahead. By Nick Cunningham, Oilprice.com

Saudi Aramco is the most hyped IPO ever – but what will buyers actually get? Read… Cooking the Books: Saudi Aramco IPO Overvalued by 500%?

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  40 comments for “U.S. Shale Kills Off the Oil Price Rally

  1. Coaster Noster says:

    DUC: “drilled but uncompleted wells”. This was an important number back in 2016, all but forgotten. Once oil went to $52, $53, per barrel, these DUC wells in the USA could start to flow with almost no added dollars.

    It’s not surprising that the crude inventory is rising fast.
    DUCs being completed!

    • matt says:

      Z H had a article posted this week that production from wells has fallen dramatically in bakken region from over drilling with map to prove this. to many wells drilled to close together. . next ten years very few ells will be left. all are in Permian region

  2. Tom kauser says:

    Blaster loves master.

  3. chip Javert says:

    And people wonder what’s fueling this market!

    (Sorry, had to say it)

  4. Maximus Minimus says:

    The OPEC deal should have included that other main contributor to the oil glut: the central banking industry free money spigot.

  5. Paulo says:

    Hard to understand the swings with stories like this? (Of course free money helps. Even still, Continental Resources is in the toilet and they are the poster child for Shale).

    “North Dakota oil production is doubtful to grow much in next few months” http://www.startribune.com/north-dakota-oil-production-improving/415699904/

    • Wolf Richter says:

      The Permian Basin (Texas and southeastern New Mexico) is BOOMING. There’s talk of another bubble down there. That’s where a lot of the new production is coming from.

      • DWIGHT EICHORN says:

        Wolf I read most of your articles and find them well worth it and I’m sure you try to get things straight (for one you have very little monetary incentive to lie to us), but your statement that “the Permian is Booming” is not substantiated by the facts. That is if you mean Booming in production.

        This quote in the article “The U.S. shale oil production response is too fast and too flexible.” is the exact opossite of the truth.

        The recent increases in US production have been coming from Alaska and The Gulf while the Bakken is down 15% and Texas down 12% from their peak in 2015. you can see for yourself at http://peakoilbarrel.com/bakken-january-production-data/

        • DWIGHt says:

          Good job Wolf. Your comment on the permian booming was probably more on target than mine. The permian is also a bit confusing since it involves conventional and some LTO. I don’t have a good idea of how much of the recent increase in the permian is due to LTO.

          The decreases in the Bakken and Eagle Ford are more than ofsetting any increase in the Permian. This OILPRICE article is flat out misleading,by hypeing up shale when the increases were from Alaska and the Gulf while the lower 48 onshore is still down 13% from the peak in 2015.

        • Wolf Richter says:

          I have no idea where you’re getting your theory that oil production in Alaska is suddenly increasing in leaps and bounds and that this is responsible for the increase in US oil production. Here is the data on Alaska, via EIA:

          – Production in Dec 2016 was below production in Decembers 2015.
          – Production in Q4 2016 (1.527 million bpd) was below production in Q4 2015 (1.542 million bpd).
          – Production in the year 2016 was up slightly from 2015 (by 13,000 bpd) but was below 2014.
          – Production in 2016 was down about 65% from 1996.

          Alaska crude oil production by month, thousands of barrels per day
          Dec-16 – 519
          Nov-16 – 513
          Oct-16 – 495
          Sep-16 – 452
          Aug-16 – 459
          Jul-16 – 438
          Jun-16 – 470
          May-16 – 505
          Apr-16 – 489
          Mar-16 – 511
          Feb-16 – 507
          Jan-16 – 516
          Dec-15 – 522
          Nov-15 – 523
          Oct-15 – 497
          Sep-15 – 472
          Aug-15 – 408
          Jul-15 – 450
          Jun-15 – 447
          May-15 – 473
          Apr-15 – 510
          Mar-15 – 506
          Feb-15 – 488
          Jan-15 – 500
          Dec-14 – 515

          crude oil production by year, in thousands of barrels of oil per day
          2016 490
          2015 483
          2014 496
          2013 515
          2012 526
          2011 561
          2010 600
          2009 645
          2008 683
          2007 722
          2006 741
          2005 864
          2004 908
          2003 974
          2002 985
          2001 963
          2000 970
          1999 1050
          1998 1175
          1997 1296
          1996 1393

          To look at the data set, got to this link…
          Choose “annual” or “monthly.” Click on “Download’ and select “Data” which will give you the spreadsheet with the data.

  6. RD Blakeslee says:

    Underlying reality: Oil has become a free-market commodity again, after years of cartel pricing.

    Consumers will remain better off because of that.

  7. Bobby says:

    Maybe we should all run out and buy airline stocks like Warren Buffet finally did after years of denial.. (Lol)

  8. TheDona says:

    OPEC is falling apart and they know it. It is becoming an Every Country for Itself situation. http://oilprice.com/Energy/Crude-Oil/Iran-And-Iraq-To-Ramp-Up-Oil-Production-Despite-OPEC-Cuts.html

    And what else do those countries have going for them?

  9. Northwest Resident says:

    I’ve been tracking articles on oilprice.com daily for a couple of years. Guarantee: If the price of oil drops more than a percent or two, oil.price will run an article attributing that drop to a) those hard working American shale producers just doing too much of what they do, or b) those pesky Saudis once again trying to knock American shale producers out of the game.

    The volatility in oil and the inability to get that price back up to where shale producers — and all oil exporting nations — want to see it is due to much more fundamental reasons than what oilprice.com would have you believe, or even be aware of. Depletion. EROIE. Very little of the “good stuff” left because we’ve burned it all up.

    This article asserts “another week of enormous crude inventory builds” has played a factor in this recent price drop. But Art Berman contradicts that often-asserted narrative:

    “The official narrative was that a larger-than-expected 8.2 million barrel (mmb) addition to U.S. crude oil inventories pushed prices lower. That explanation is not consistent with larger recent additions to storage that had little effect on oil prices.”

    “Perhaps more importantly, a major downward shift in the term structure of oil futures contracts suggests that headwinds in the global economy are driving the end of the present oil-price rally.”

    Trust in oilprice.com to disseminate the official (propaganda) narrative on a daily basis. Look elsewhere for actual facts:


    • Wolf Richter says:

      You apparently never read oilprice.com – otherwise you would have known this:

      Here is the same Art Berman article you linked, but on Oilprice.com:

      Here are Art’s other articles on Oilprice.com:

      I like Art’s work. But I don’t like when you make a fool of yourself on my site in this nasty manner.

    • RD Blakeslee says:

      “The volatility in oil and the inability to get that price back up to where “The volatility in oil and the inability to get that price back up to where shale producers — and all oil exporting nations — want to see it is due to much more fundamental reasons than what oilprice.com would have you believe, or even be aware of. Depletion. EROIE (SIC: EROEI). Very little of the “good stuff” left because we’ve burned it all up.”

      Not sure, but you appear to be arguing that the energy needed to produce more oil energy (i.e. extra energy cost) is rising, which is why prices can’t rise. I don’t get it.

      It seems to me that increasing costs would tend to inhibit more production and cause RISING prices. Explain.

      • Yoshua says:

        Petroleum is energy and it takes energy to produce petroleum.

        When the energy cost to produce petroleum rises to 55% of the energy content in a barrel of petroleum, then that also equals the cost to produce a barrel of petroleum.

        The remaining 45% of the energy in a barrel of petroleum equals the petroleum producers income.

        The cost will from then on exceed the income. After that point the oil market can never again rebalance.

        The TOTAL cost of petroleum production (extraction, refinery, distribution) includes everything from energy, capex, infrastructure, science, technology, military security
        … and is almost impossible to calculate.

        • Kam says:

          Energy in vs. energy out is a bogus tool. It depends entirely on the cost on each side of the ratio.

        • Yoshua says:

          Energy is the economy. Nothing moves without energy.

          When the energy sector consumes all the energy it produces and the economy no longer receives energy everything stops.

          The system will of course collapse before that point. We are now in the collapsing phase.

        • d says:

          “The system will of course collapse before that point. We are now in the collapsing phase.”

          This should read

          The system will of course collapse before that point. Without out energy innovation. We will enter the collapsing phase.

          Nothing, apart from rising sea levels, until the next ice age, is cast in stone, yet.

        • Yoshua says:

          We are waiting for that energy innovation. They left it to the eleventh hour it seems, since nothing has arrived yet. meanwhile while we are waiting we are in the collapsing phase as we speak.

    • Wolf Richter says:

      By the way, I also published some of Art Berman’s articles. They’re here: http://wolfstreet.com/author/art-berman/

      All via oilprice.com. I have permission to republish their articles. So I pick and choose what I agree with and what I like.

      They publish a number of articles every day on energy. I publish maybe one or two a week on energy. That’s a big difference. Often they will have two articles by two different authors, on the same day, that disagree with each other on some issue. That’s just their style. If I had six articles a day on energy, I might do the same thing, if I can see both sides of the story (sometimes I can’t). Readers get the perspective and they can decide.

  10. FluffyGato says:

    The elephant in the room is that oil has a just as big (if not bigger) Demand issue as it does Supply.

    Constraining supply doesn’t work if the demand isn’t there. All those hoping that Chinese demand will make up the difference probably aren’t aware that the Chinese stocked up when oil was in the $20s, $30s and $40s.

    • d says:

      And they haven’t noted, that the chinese demand for personal vehicles has dropped considerably, much more than the Auto manufacturers anticipated. china is now, like the US, a replacement, not a new user market, and cars, even chinese ones, are lasting longer whilst using LESS FUEL.

      india is the new user car market currently. But it is not growing very quickly, like Indias “Real Economy”.

      • Jonathan says:

        Funny how the oil industry’s greed inadvertently drove everyone else clinging to every bit of permanent energy efficiency they can get possibly their hands on? Besides, the world population is aging rapidly and birthrates are imploding.

  11. mean chicken says:

    Thought I’d seen notes where more production was coming back on line, Libya, etc? I vividly recall the warnings that oil would remain @$20’s forever, those were wrong too.

    I’d bet smart money was loading up there (20’s) and talking down the price while recently fake news was hyping hedge fund buying as smart money was trying to distribute into strength.

    Ever notice how stocks often take downgrades just before ripping higher and vice-versa? Seriously, pat attention please!

  12. RD Blakeslee says:

    From an arch-conservative: Buy oil lamp stocks (paper or liquid, your choice …)

  13. d says:

    “Witness Venezuela for the poster child of this, and remember they are all going to end up like that unless prices rise at least 75% more.”

    Or the revamp their budgets which Saudi is doing and iran is not.

    Saudi got to used to untenable $ 100.00 + oil and budgeted to it.

    They realise now, that was a huge mistake.

    They know, they now need to budget on $ 25.00, and use the rest to pay down debt or save for a rainy day. As sub $ 25.00 Oil dosent stay around to long.

    Apart from trying to tuck the rest of the world on the partial IPO price for ARAMCO. Saudi is revamping its budgets. unlike Iran and other Oil producer Economies.

    The people who run Saudi, do suffer from senility, from time to time, they are however, not completely stupid, do not view them as such.

    • Corto Norvegese says:

      I could not disagree more. Iran has not budgeted with anything, quite the contrary, they have just recently come out from a decade of sanctions. Moreover they have a diversified economy and a well educated population.

      Saudi Arabia is a backward theocracy where 90% of the indigenous population live off government handouts. And how on earth can you claim that they are paying off debt? Have a look at their FX reserves, at the current rate they are gone in five years. They are increasing their debt if anything, tapping the bond markets last year for the first time in more than a decade.

  14. Mark says:

    Oil is finite, while fiat money is infinte, Banksters; Fed’s and Wall St. can manupilate oil price to any level at will, and do so. The petrodollar system is base on Fiat, therefore completely rigged, manupilate and abused.
    That’s explains most all the illogical insane sudo oil market!

  15. david rohn says:

    is it at all possible that as more and more, cheaper and cheaper solar power comes on line, and even cars can be powered by solar generated electricity, that the oil (and their govt-related cronies) interests are speeding up their ‘valuable’ reserves into production, before they lose their value and become obsolete?
    Down the road aren t people going to charge their cars and homes from solar roof and driveway-mounted modules? …in spite of the cartels’ and govt’s trying to maintain their control over energy, it s supply and costs, for obvious strategic and taxation purposes…

  16. Tom kauser says:

    Never been a more critical time to stop driving and start listening ?
    AIG just took a 3 billion dollar dump promotion of a turnaround artist to CEO and a executive search for a new turnaround artist? What rhymes with artist? 2007!

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