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.
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“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.”