Crude prices have received a fillip since the start of the year amid signs that the severe supply/demand imbalance afflicting the market may be on the mend. Although the Brent benchmark collapsed from highs of $115 per barrel last summer to below $50 in January, prices have stabilised more recently and were last dealing around $55.
This renewed sentiment has been fuelled mainly by a steady drop in the number of shale rigs operating in the US — indeed, latest Baker Hughes data on Friday showed the rig count decline by a further 12 units during the prior seven days, to 813.
US shale sector keeps on pumping
Still, I believe that the earnings picture at industry giants like Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), BP (LSE: BP) (NYSE: BP.US) and BG Group (LSE: BG) remains on precarious ground as production from the world’s biggest oil consumer keeps on swelling.
The US Energy Information Administration (EIA) has announced that total oil production in the country registered at an eye-watering 9.4 million barrels per day in February. This is just off the all-time peak of 9.6 million barrels punched during the 1970s, and the EIA expects this to keep on growing — an average daily production figure of 9.5 million barrels is pencilled in for 2016.
While it is true that Baker Hughes’ numbers on Friday showed the rig count fall for the 16th successive week last week, the number of rigs being unplugged last week registered at their lowest level since December. And as Investec points out, “with well productivity rising by 50% in 5 years, the free-fall in rig count does not imply an upcoming shale output collapse.”
Storage levels keep on bloating
Indeed, the glut of oversupply washing over the oil market was also underlined by US crude inventory numbers last week, which showed levels rise an additional 8.2 million barrels in the seven days to Wednesday. This represented the tenth weekly rise and pushed total inventories to some 466.7 million barrels, a fresh high since the early 1930s.
Strident US production is, of course, not the only bugbear for the oil market. Industry group OPEC has also vowed to keep output rattling higher as it bids to increase its market share, while sluggish global economic growth is failing to pick up the slack. I therefore reckon an environment of subdued crude prices is set to reign for some time to come, a terrifying prospect for the fossil fuel sector’s earnings outlook.