The oil market, notwithstanding its recent rise, could be undermined by soaring U.S. production. Volume from U.S. oil fields (inclusive of shale) has risen 22% since mid-2016 to 10.3 million barrels per day – the most since the EIA started maintaining weekly data in 1983. In early February, oil production broke through the 10 million barrels a day threshold for the first time in nearly 50 years and has maintained the record levels thereafter.
While there is renewed optimism among U.S. oil companies amid the $60-plus WTI prices, crude’s recent gains could become self-defeating as elevated realizations have already induced producers – especially U.S. shale drillers – to ramp up activity. Together with the scheduled conclusion of OPEC/non-OPEC production cuts in December this year and we are looking at another selloff in oil prices.
A rise in the oil drilling rig count points to a further increase in domestic output. An early gauge of future activity, rigs drilling for oil in America totaled 800 in the week to Mar 2, as per the latest weekly report by Baker Hughes, a GE Company. That’s much higher than the year-ago tally of 609, indicating a drilling resurgence in tandem with the oil revival – a big concern for investors.
Meanwhile, natural gas continues to struggle as well, with production forecasted to rise to an all-time high of 81.70 billion cubic feet per day (Bcf/d) in 2018. That would easily top this year’s demand projection of 78.19 Bcf/d.
Despite an extended stretch of record low temperatures in the U.S. from late December into January, the heating fuel could not move meaningfully higher. Things took a turn for the worse with the February weather turning out to be disappointing amid sustained strong output. Now, with the 2017-2018 winter heating season on its last leg, natural gas prices over the coming weeks are unlikely to go above $3 per million Btu.
Overall, the tough market conditions for oil and gas have prompted money managers to raise red flags for certain types of energy stocks.