Last year, ‘Energy’ was the strongest S&P sector performer with a market-thumping 24% return. In particular, November’s historic OPEC-led production cut deal to alleviate a supple glut managed to buoy oil prices and stabilize them around the psychologically important $50 per barrel threshold. The commodity was on a stellar run on optimism surrounding the agreement, and the outlook for oil stocks was getting better.
The seemingly positive developments encouraged investors to bet on firming prices for 2017 with the oil industry finally hoping that ‘this would be the year.’ True to the strong sentiments, U.S. oil prices reached around $55 per barrel in late February, the highest level in 19 months.
However, the situation is drastically different now, with the commodity having floundered in recent weeks. By June 21, crude had cratered more than 20% from its February highs and officially plunged into bear territory. In fact, prices ended down 14.3% for the first half of the year – the worst performance since 1998.
Apparently, there was one small thing that the bullish speculators didn’t account for – the spectacular boom in U.S. shale production. Arguably, the biggest development in global oil markets over the last few years, the relentless increase in North American shale output has undermined efforts by OPEC and other major producers to ‘rebalance’ the market and prop up prices.
Supply Side Woes Plague Oil Market
Apart from the much-discussed shale production issue, there are some other reasons as well why oil markets remain oversupplied.
At the crux of the matter is the rising flood of U.S. shale-driven production. Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques.
No Comments