With oil prices holding above $50 per barrel, U.S. shale firms have stepped up their activity, helping to counterbalance cuts made by the OPEC cartel and some non-OPEC producers. Last week, the country’s rig count soared by 15, a strong indicator that shale output is seeing a resurgence now that the global oil market has steadied at higher levels than seen in 2016. Since its bottoming out in late May, the rig count has risen by 250, or an enormous 80 percent.
While production hasn’t fully recovered, it has increased by more than 300,000 b/d since September to average just under 9 million barrels per day. As a result, the OPEC-fueled boom in prices, which pushed NYMEX crude from around $40 in early August to the $55 level by the end of 2016, has stalled for the time being. Moreover, in the past two weeks, consumers have found some relief at the pump as prices have nudged slightly back downward.
There could be room for more downward pressure on oil and retail prices in the near term, given that gasoline demand is typically soft during the winter months and shale is surprising to the upside. At the same time, hedge funds and other speculators have made record bets on higher prices, believing that OPEC cuts will be greater than supply gains from shale. If speculators all exit the market at once, prices could fall back sharply in a hurry. The second half of the year could bring a different story, however. Analysts are expecting a supply deficit to emerge during the third and fourth quarters as the OPEC/non-OPEC cuts work their way through the global oil market. That, of course, will mean higher prices for consumers.
But if recent trends are any guide, shale may again help provide relief going forward. Can U.S. production continue to rebound sharply with prices at these levels? In a scenario with prices in the $55 neighborhood, shale could rise by another 1 million barrels per day (mbd), pushing output levels beyond the April 2015 peak of 9.63 mbd, said Goldman Sachs.
Against that backdrop, U.S. shale could further compensate for more than half of the OPEC/non-OPEC production cut agreement of 1.8 mbd. A lower-price environment would, of course, bring about only modest gains for shale producers, allowing OPEC to create more of a gap in global fundamentals and a possible price spike later on. The oil market still appears as though it will trade in range of $40-$55 for now, with shale capping the market on the upside and OPEC cuts providing a floor. There’s an illusion of calmness, which shouldn’t be taken for granted with so much uncertainty in the system.