Shale Producers Have Been Smiling Lately

By: Mike Dombroski / October 7, 2016

Rising crude oil and natural gas prices over the past month have put smiles on the faces of many U.S. shale producers. The two catalysts: OPEC and psychological trading levels.

Despite OPEC producing record output last month at 33.24MMbpd, their possible production cap agreement has rallied crude prices. They’ll officially meet on November 30th to determine each member’s production levels in order to cap their output. This has limited the selling in the commodity and allowed WTI to settle at $50.44 yesterday, the highest settlement since June and over the psychological level of $50. This may make it difficult for the bears to attempt at lowering prices until the meeting.

Natural gas has also been on an uptrend, most recently settling at $3.049 yesterday, over the important $3 threshold. This happened despite the EIA reporting an injection of 80 bcf into inventory yesterday which was 10 bcf more than expected. Many traders are betting on the long side of natural gas before winter as forecasters continue to provide their weather outlooks.

The price increase in both commodities has allowed the shale producers to hedge their future production. Basically, they can sell futures at higher levels to guarantee margins on the production and inventory they expect to have a few years from now. Historically, some producers refused to hedge some or even all of their expected production, betting on sustained higher prices. However, they have learned their lesson as prices have fallen substantially since 2014 during the horizontal drilling and hydraulic fracturing revolution.

Therefore, the battle between OPEC and the shale producers continues. U.S. producers are smiling now, but OPEC will have the next decisive say come November.

 

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Mike Dombroski

Written by

Mike Dombroski


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