Will Shale Recover with the Recent Oil Price Rise, or has it been Hit too Hard?


The International Energy Agency (IEA) believes that oil prices might have bottomed out. This belief comes with the warning that they cannot be sure when in 2017 the oil market will find any balance. Oil prices are indeed on the rise, as the EIA points out prices have gone up by forty percent since early February. This should be regarded with some caution though as predicts that the rise has very little to do with the oil market’s underlying supply and demand forces, but is mainly the result of critics believing the price could go down no further.

According to the site, “Much of the rally has a lot more to do with market sentiment than with the fundamentals. Oil speculators have closed out a huge chunk of their short positions, making bets that oil prices had reached a bottom. The short-covering rally contributed to a sharp jump in prices.”

Others believe the recent uptick in prices is more than just market sentiment. Bill O’Grady, an influential trader and strategist at Confluence Investment Management, believes oil has indeed bottomed out. “Gasoline demand is improving, and we have a strong speculative participation in the market. You are building a base for oil to trade between $30 to $50,” according to O’Grady.

Some analysts though believe the rise in prices is not the solution to the market’s woes and wonder out loud if it will not become self-defeating. American shale producers might ramp up production again in the wake of the price jump. Jeffrey Currie, head of commodities research at Goldman Sachs, worries whether this surge to $50 per barrel will not just end up being another problem six months down the road.

Whether the US shale industry can just increase production is however up for debate. Considering that over 100,000 jobs have been lost and 60 percent of fracking equipment is idle or off-site, cranking up production in a meaningful way cannot happen overnight. John Hess, CEO of Hess Corporation tells the Wall Street Journal, “The balance sheets of these shale-only producers have to be repaired for them to get back to drilling. That’s going to curb any recovery.” He is also not the only one with this belief. Lynn Helms, Director of North Dakota’s Department of Mineral Resources was quoted as saying, “If you’ve been on a strict diet for a long period of time, it takes a while to put the weight back on.”

Even the shale oil companies themselves seem to agree with this assessment. The boss of one fracking company, Basic Energy Services, recently told a conference that after it laid off forty percent of its workforce, those employees won’t be back.

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