Many investors were surprised at how quickly U.S. shale production recovered after the two-year global supply glut led to a slump in crude oil prices, bankrupting many shale firms.
Today, the Permian, which spreads across West Texas and eastern New Mexico, is producing about 2.5 million barrels of oil per day (BPD), accounting for about one-quarter of all U.S. oil production.
“We’ll have to see if these U.S. producers have the discipline to not go crazy and keep prices where they keep making money,” said Gary Bradshaw, the portfolio manager at Dallas-based investment firm Hodges Capital Management, reports Reuters.
Money and equipment are pouring into Texas, and in April, the oil industry added 3,800 new jobs, with 55 percent of them in Texas. Texas oil and gas extraction now has 92,100 jobs with another 122,000 in support activities for mining. So yes, there is an increased focus on accelerated production.
Hedge funds reduce size of their positions
Because of a real concern that producers are pumping oil so fast that they will be shooting themselves in the foot, eight prominent hedge funds, with assets of $286 billion and substantial energy holdings, have reduced the size of their positions in 10 of the top shale firms by over $400 million.
In June, the Dallas Federal Reserve Bank noted that in addition to an increase in employment in the oil and gas industry in the Permian, operating rigs numbered “356 in the Permian and 98 in the Eagle Ford as of May 2017.”
Horizontal rig counts in Texas increased from 359 in April to 388 in May, while vertical and directional rig counts in Texas fell from 67 to 65 over the same period. Using horizontal rigs for fracking to get to the hydrocarbons locked in the shale is easier than the other methods.
Hedge funds began pulling back in the first quarter, based on the most recent regulatory filings. However, stocks have continued to struggle due to the volatility of oil prices. And according to Mark Connors, global head of portfolio and risk advisory at Credit Suisse, they have continued to pull back.
The 10 Permian stocks analyzed have, on average, dropped 18 percent this year, compared with the broader S&P 500 energy sector’s 13 percent fall. The production outlook is worrisome even with the Organization of the Petroleum Exporting Countries (OPEC) extending an output agreement in the hope of mitigating the global glut.
Non-OPEC countries, particularly the U.S. continue to increase production and this weighs heavily on oil prices, and it is evident. On Wednesday, U.S. crude oil prices hit a six-month low at close to $44 a barrel.
