27 October 2016
OPEC is likely to keep oil prices low to prevent a resurgence of output from shale gas producers. Photo: Bloomberg
OPEC is likely to keep oil prices low to prevent a resurgence of output from shale gas producers. Photo: Bloomberg

Rising number of US oil wells likely to cap oil price increase

The number of oil wells is a key indicator of the impact of low oil prices on US output of shale gas.

The latest data shows the number rebounded for the first time after 12 consecutive weeks of decrease.

There are now 387 oil wells, much fewer than the 825 at the same time last year.

But the rebound has a more symbolic meaning.

In the past month, Russia and the Organization of the Petroleum Exporting Countries finally reached an agreement to freeze output, though Iran’s absence from the deal may lead to unfavorable results.

The accord was a catalyst for a big bounce in oil prices.

As I have warned several times, the bounce will activate US shale gas production, just as we saw in the second quarter of last year.

The price war is likely to last.

Compared with the bottom of US$26.05 a barrel in February, the price of WTI (West Texas Intermediate) crude oil futures contracts trading on NYMEX have rebounded by over 50 percent.

The current price of US$40 is already a profitable level for some shale gas producers.

Oil prices now depend on how firm the OPEC members are about maintaining low price levels and their attitude toward shale gas.

While it is not possible for OPEC members to “kill off” shale gas, the key is how much market share they will allow the shale gas producers.

As long as the rebound in oil prices continues, OPEC members’ profitability will climb.

On the other hand, the subsequent increase in shale gas output will again threaten OPEC countries’ share of the energy market.

I think the OPEC members are trying to raise crude oil prices to test the shale gas producers’ ability to recover.

As the number of oil wells climbs, the OPEC members may have noticed and may now be trying to avoid a further climb in oil prices.

If the number of oil wells in the US continues to increase until the middle of April, when OPEC holds its next meeting, investors should not expect any new message.

There is a greater probability that the price of WTI will fall below US$40 a barrel than rise above it.

This article appeared in the Hong Kong Economic Journal on March 23.

Translation by Myssie You

[Chinese version 中文版]

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Vice president, ADMIS Hong Kong Limited

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