Americas News
Oil Glut and U.S. Shale Worries Cause Market Losses For The Week
Persistent worries about the global glut, inflamed by news of U.S. shale builds, resulted in a flat end-of-week market for crude, with Brent on Friday trading at $55.72 per barrel (just 7 cents above its last close) and West Texas Intermediate settling up 4 cents at $53.40 per barrel.
Both benchmarks posted losses on the week, with WTI down nearly 1 percent and Brent falling 1.7-percent.
Once again, the figures proved that the highly-touted 90-plus percent compliance rate achieved by members under the Organization of the Petroleum Exporting Countries (OPEC) cutback agreement simply isn't strong enough news to eclipse findings from Baker Hughes that U.S. energy companies added rigs for a fifth straight week, extending a nine-month recovery made possible by the $50-$55 oil price range driven by the OPEC cuts.
It's also problematic whether rumours that OPEC will extend its agreement to cover the second half of 2017 will do much to improve market conditions: Mark Watkins, regional investment manager at U.S. Bank Private Client Group, told CNBC, "It's encouraging that it may not be a six-month deal but one of the issues is if you look at OPEC and other members basically reducing their supply and U.S. shale producers profiting from it, that's going to produce some turmoil."
He added, "At some point, it's going to be difficult for that agreement to stay in place when member countries can drill more and make more money."
Several reasons for oil staying in its current range have been cited in recent weeks, the lack of clarity over whether a cutback extension will be enacted being one of them: Stephen Innes, senior trader at OANDA, told Reuters, "Despite the headlines, the massive inventory glut in both oil and gasoline continues to thwart any upward momentum."
But even though U.S. producers are increasingly seen as a threat to the longevity of the OPEC agreement and a major contributor to the glut, it's not as if American shale has free license to expand: shale producers are reportedly facing their first production cost increase in five years as activity picks up and energy service providers hike fees.
According to Rystad Energy data, per-barrel costs for producers will rise an average of $1.60 across the shale patch to $36.50, with service and supply firms eager to take back discounts (between 10 and 15 percent) they extended during the slump.
Bill Costello, a portfolio manager at Westwood Holdings Group, remarked, "To certain producers, there's a little bit of opportunity to lower costs more - but those are few and far between."
Presumably also casting a pall over the market is the growing realization that the much-bandied OPEC cutbacks are not all they're cracked up to be, despite the high compliance rates: last week, Richard Gorry, managing director at JBC Energy Asia, told CNBC that OPEC members "were really trying to protect oil price on the downside, because in the last two quarters we literally saw prices fall off a cliff, and OPEC were very mindful of that coming into this year.
