Heightened U.S. Oil Output Isnít Containing Rising Prices

 Alan Neuhauser

THE "BIG THREE" OIL services firms that serve as a bellwether for U.S. shale production posted big gains in the first quarter of 2018 as benchmark prices surged this week, signaling not only that rising prices have reignited American production but that U.S. oil output hasn't put a damper on prices as expected.

The firms Halliburton, Schlumberger and Baker Hughes saw their revenues grow by 15 percent compared to the same period last year, and their sales jumped by nearly a quarter.

Benchmark Brent crude oil, meanwhile, climbed past $75 a barrel Wednesday before falling slightly – up from $49 a barrel last year and a nadir of roughly $26 a barrel in February 2016. Benchmark West Texas Intermediate oil was hovering around $68 a barrel.

The Brent and WTI prices have both exceeded analysts' expectations.

As recently as this year, experts were predicting that prices – spurred higher by OPEC production cuts and rising global demand – wouldn't climb past the mid-$60s, capped by U.S. shale operations brought back online amid the steady rise in prices.

As of April 20, 156 more oil and gas rigs were active compared to last year. But that hasn't appeared to put much of a dent in prices.

"We think that U.S. shale production will not cap oil prices this year because there's so much room for them to grow and demand is high," says Audun Martinsen, vice president of oilfield service research at Rystad Energy, a consulting firm.

A key factor behind the rise in prices is the decline in the worldwide glut of oil: Saudi Arabia led OPEC nations in 2015 in creating the surplus, ramping up production in 2015 in a bid to drop prices and bump-out costlier U.S. competitors. Prices dropped to historic lows the following year, which forced hundreds of U.S. drilling rigs to go offline, but it also put a crimp in the budgets of OPEC nations, including Saudi Arabia, that heavily rely on oil revenue.

In January 2017, OPEC nations and Russia agreed to production cuts to stabilize prices, a deal that the countries renewed in November. Combined with rising demand, including in Asia, global stores of oil have since steadily fallen, even as U.S. rigs have been brought back online with the rise in prices.

Reuters reported last week that senior Saudi officials floated the possibility of letting prices rise to as much as $80 or $100 per barrel. While the prices have been a boon to producers, they appeared to attract the ire of President Donald Trump, who lashed out on Twitter last week.

Trump has sought to develop closer ties with Saudi Arabia and the kingdom's heir, Crown Prince Mohammad bin Salman. The crown prince, meanwhile has sought to cultivate U.S. support for the kingdom's war in Yemen and its blockade of Qatar, as well as in its longtime rivalry with Iran.

U.S. action toward Iran was likely another factor that contributed this week's rise in crude oil prices, experts say. Expectation has been mounting that Trump will follow through on his pledge to withdraw the United States from its 2011 nuclear deal with Iran, a decision that could lead to new sanctions. The resulting rise in prices would appear to reflect both the market's typical reaction to geopolitical turmoil in the Middle East, as well as longer-term concern about potential supply disruptions.

"In terms of the exports from Iran, they typically go to China, which is going to consume this regardless of U.S. sanctions, so in that way they don't have much impact," Martinsen says. "But over the longer time, the willingness of Western companies like Schlumberger and others to actually invest and put their technology into Iran can affect their production growth. That's over the longer term: 2019-2020."

Trump, however, also appeared to leave the door open this week for a new deal with Iran in remarks after a meeting with French President Emmanuel Macron, a statement that may have played a role in the slight drop in prices Wednesday.

If prices remain above $70, that could spell a good year not only for shale producers, but offshore drillers as well. Rystad predicts that offshore oil development will double by the end of this year.

"We will have a quite interesting year," Martinsen says. "Shale companies will have a very good year in terms of revenues. You will then see offshore companies reporting larger and larger intakes, and you can expect the stock market start to move and get more confidence into offshore and the shale."

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