After the plunge in crude oil prices, many oil producers idled a portion of their operations to help keep costs down. However, with energy prices rebounding, drillers will begin drilling again, potentially capping gains in the oil industry and sector-related exchange traded funds over the short-term.
Across oil and gas fields from Texas to Pennsylvania, oil producers have kept the flood gates on 4,731 wells closed, idling 322,000 barrels a day underground or the equivalent of what Libya has been producing this year, Bloomberg reports.
The so-called fracklog, or number of wells waiting to be hydraulically fractured, has tripled over the past year after companies shutdown operations in light of the low oil prices. However, with oil prices rebounding – West Texas Intermediate crude oil futures were back up to $57.9 per barrel Thursday, the fracklog may slow a recovery as more companies finish wells and restart their pumps.
The energy sector has been tapering off after a swift rebound over the past month. For instance, the Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which includes North American hydraulic fracturing companies, is down 2.3% and the broader Energy Select Sector SPDR (NYSEArca: XLE) is 1.0% lower over the past week.
[The FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR) provides exposure to the rising demand for natural resources and tracks global companies in the energy, metals and agriculture sectors, while maintaining a core exposure to the timberlands and water resources sectors. Specifically, GUNR includes 32.2% energy, 29.6% agriculture, 27.9% metal, 4.9% Timber and 4.8% water. [Diversity in a Natural Resources ETF]
“Once service costs come down and drillers begin to work through their higher-than-normal backlog, the market should start to price in that supply coming online,” Andrew Cosgrove, an energy analyst for Bloomberg Intelligence, said in the article. “It may act as a cap on prices.”
Bloomberg Intelligence projects oil production in the U.S. could rise 322,000 barrels a day to an average 7.485 million at the end of 2016 if drillers diminish the fracklogs by 125 wells per month. If drillers wait for prices to rise to $65 per barrel for an extended period, the forecasters expect supply to rise 500,000 per day to 7.67 million.
ConocoPhillips (NYSE: COP) Chief Executive Officer Ryan Lance has already voiced concern over a potentially supply spike as producers complete wells on higher prices and rising demand.
“Those who are drilling and deferring completions – obviously if they get a price signal that the commodity price is coming back a little bit you’ll see more supply come on,” Lance warned at the IHS CERAWeek Energy conference.
For more information on the energy space, visit our energy category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.