Investor appetite across the oil sector has received a bump in recent weeks on the back of a recovering oil price. Industry goliath Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) has seen its shares gain 8% since mid-January as the Brent benchmark has ticked higher, although shares have stabilised as the oil price recovery has paused for breath.
Fossil fuel peer Tullow Oil (LSE: TLW) has enjoyed a similar upward push in recent weeks, while embattled Afren’s (LSE: AFR) heavy share price descent has ground to a halt over the past month.
Shale scalebacks on the turn?
Brent’s surge from multi-year lows has been prompted by production cutbacks across the US shale sector, with data from industry specialists Baker Hughes during the past few months revealing a sustained reduction in rig activity as cost pressures bite.
Still, the amount of hardware being taken out of action appears to be slowing, culminating in a reduction of just 37 rigs in the week ending February 20 to 1,019 projects. This compares with 84 rigs being put on hiatus in the previous week, 83 the week before that, and 94 in the seven days concluding January 30.
Of course, the effect of reduced shale output cannot be sniffed at, particularly when the current rig count is at its lowest since the summer of 2011, and the number of facilities currently in operation has collapsed from 1,609 just last October.
But should the rig rate decline continue to slow, the subsequent effect on the market balance could take longer to be felt than first hoped. And with the Organisation of Petroleum Exporting Countries (OPEC) committed to increase the amount it pumps, and spluttering global economic growth failing to suck up excess supply, the oil price’s recent rally could prove a short-lived phenomenon.
Oil prices expected to flail
Indeed, Bank of America-Merrill Lynch warned this week of “a growing risk of Brent slipping to $31 per barrel as global oil inventories build sharply,” adding that “the oil market needs to see non-OPEC supply curtailments, OPEC output cuts, or stronger global demand” in order to find a floor. So signs of a further slowdown in North American output cuts could prove disastrous for the price.
The broker added that Brent should average $50 per barrel in 2015 before edging to $57 next year, suggesting a comedown from current levels around $60. Should such a scenario materialise, Shell and the rest of the oil sector’s major players are likely to see their shares slip once again.