HOUSTON – The recent surge in crude prices may have already delayed the day when the oil market can stage a major, sustained recovery and buoy Houston’s economy again.
In a new report Tuesday, Morgan Stanley said oil hedging among petroleum producers is “already rampant” amid the oil rally, which came just a few weeks after oil prices fell below U.S. shale break-even costs and pushed the nation’s oil production toward a steep drop.
Short positions among oil producers, which are helping them lock in higher prices for the oil they produce, have recently reached a new high since January to more than 500,000 contracts, data from the U.S. Commodity Futures Trading Commission shows. That could fix some balance sheet problems, give some drillers access to capital markets and prompt others to finally pump crude from wells they’ve drilled but left offline, Morgan Stanley said.
“Higher crude prices and hedging can ultimately slow the U.S. production decline,” Morgan Stanley said. “Hedging could keep supply more stable and less responsive to prices, just as excitement about declines was building.”
Some oil companies, faced with high debt burdens and stricter banks, have been forced to lock in prices for the oil they produce. But other healthy, mid-sized and large drillers in the Permian Basin — the last U.S. shale play to stall out — have also secured positions.
And some could turn on drilled-but-uncompleted wells. At least one major U.S. oil producer has said it could turn on its backlogged wells at the $40 to $45 per barrel range, close to current levels for future contracts that go months out, “which could support rapid rigless production.”
Estimates vary widely on how big that production surge could be. Goldman Sachs says the dormant wells could produce 620,000 barrels a day for six months if they were all brought into production at the same time. But others say the number of wells in inventory have been vastly over-counted, with analysts including in their calculations a naturally occurring tail of wells that are drilled but left dormant because of technical problems. Those wells, analysts say, will likely never be turned on.
Either way, this recent oil-price rally resembles the one in the second quarter of 2015 that sent prices up to levels where it was profitable again to order drilling equipment and pump out more crude. That rally didn’t last long, but it was enough to keep U.S. producers going months longer. Oil prices over the past four weeks have been bolstered by an improved economic outlook, a weakening dollar and other more transitory factors like pipeline outages in the Middle East.
But the world still gets more oil than it needs, and global energy markets won’t get back into a supply-demand balance until U.S. crude output falls enough to stem the oversupply.
“Such false rallies can actually be harmful for the recovery,” Morgan Stanley said. “Hedging 2017 at these elevated prices could help companies lock in returns, and/or support higher rig counts than (the) recent flat price would have suggested.”
U.S. crude fell $1.01 to $36.17 a barrel in early trading Tuesday on the New York Mercantile Exchange, down 6 percent from its recent three-month high on Friday.