The oil market just hit a yellow light.
Crude’s advance of more than 90 percent from a 12-year low earlier this year has U.S. shale producers starting to return to their drilling rigs, threatening to slow further gains.
“The $50-to-$60 a barrel area is the sweet spot,” said Mark Watkins, the Park City, Utah-based regional investment manager for The Private Client Group of U.S. Bank, which oversees $128 billion of assets. “You start to have producers come back at $50, but a lot of them come in at $60.”
Helmerich & Payne Inc., the biggest drilling-rig contractor in the U.S., and Independence Contract Drilling Inc. said last week they were receiving more queries from oil explorers.
“Everyone is questioning the price when U.S. rigs come back,” Paul Sankey, an energy analyst at Wolfe Research, said June 10 on Bloomberg Radio. “At $55 to $60 we would return to growth in the U.S.”
The number of active oil rigs in the U.S. increased by three last week after jumping by nine in the prior seven days, the first back-to-back gain since August, Baker Hughes data show. U.S. crude production is still well below last year’s peak, and explorers have idled more than 1,000 oil rigs since the start of last year.
Forecasters including the International Energy Agency and Goldman Sachs agree that the crude glut is starting to dwindle as the Organization of Petroleum Exporting Countries’ policy of maintaining output squeezes out higher-cost rivals.
Outages also have taken their toll on supply, with global disruptions reaching an average 3.6 million barrels a day last month, the most since the Energy Information Administration began tracking them in 2011. Fires in early May in Alberta took out an average 800,000 barrels last month, while Nigerian crude output dropped to the lowest in 27 years as militants increased attacks on pipelines in the Niger River delta.
“In April and May, before the worst of the disruptions, there was already a consensus that the market would be in balance the second half of the year,” said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. “Nigeria and Canada just accelerated the rebalancing.”
“This is the most hated bull market in history,” Sankey said. “Everyone thinks it will end.”
