Oil traders hunt for shale’s pain threshold

Crude prices are likely to remain under pressure until there are signs the number of rigs drilling for oil in the US is stabilizing or reversing lower.
US exploration and production firms have hired 530 extra drilling rigs since the end of May 2016 — 431 to target oil and 99 to focus on gas — according to Baker Hughes.
As a result, US crude and natural gas liquids production is forecast to increase by 780,000 barrels per day (bpd) in 2017 and by more than 1 million bpd in 2018, according to the US Energy Information Administration (EIA).
US producers will seize more than half of the projected growth in global liquids consumption of 1.54 million bpd in 2017 and 1.62 million bpd in 2018.
Experience suggests the Organization of the Petroleum Exporting Countries (OPEC) and its non-OPEC allies led by Russia will eventually respond by increasing their own output to protect market share against the threat from US shale producers.
The prospect of a renewed rise in OPEC output and global oil inventories during 2018 has thrown oil prices onto the defensive over the last four months.
A continued rise in US output during the rest of this year is unavoidable given the large number of extra rigs put to work in the first half.
The lag between spudding a new well and first commercial production averages about six months, so extra rigs in the first half will ensure continued growth in output during the second half.
But the fall in prices, if sustained, will eventually cause the rig count to stabilize, curbing growth in output next year.
The break-even price for drilling new wells varies considerably among shale plays and even between different parts of the same play.
But a recent survey of producers in the major shale plays conducted by the Federal Reserve Bank of Dallas showed most needed US crude prices of $45-$50 to break even.
West Texas Intermediate (WTI) crude prices have already declined more than $11 per barrel, over 20 percent, since their recent peak and are now below $44 per barrel.
Exploration and production firms have added an extra 145 oil-focused rigs in the last 16 weeks even as WTI prices have fallen. But the oil rig count typically responds to changes in WTI prices with an average lag of 15-20 weeks so it should stabilize and turn lower within the next four weeks
Until the rig count starts to stabilize, however, oil traders are likely to continue driving prices lower to try to uncover the pain threshold that forces shale firms to scale back drilling.
Prices are likely to overshoot on the downside, as traders drive them lower than necessary owing to the lags in the system, which will create conditions for a subsequent rally.
Once stabilization occurs, it should provide some support for prices and the relatively large number of hedge fund short positions should then help fuel a limited rally once fund managers start to cover them.
Hedge fund managers added nearly 70 million barrels of extra short positions in WTI and Brent between the end of May and the middle of June, and are likely to have added even more since then. First, however, oil traders need a clear sign that the drilling fleet is stabilizing.

Source: Arab News