The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is higher by nearly 9% over the past month. While many oil market observers focus on the Organization of Petroleum Exporting Countries (OPEC) as a major market force, U.S. shale prices continue to be a potential hurdle for oil as it tries to add to its recent rebound.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts.
Meanwhile, advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, but the growth rate of U.S. oil product has also recently slowed.
Second-quarter earnings reports from U.S. shale firms “suggest staying power for a supply glut that’s kept world oil prices on a roller-coaster ride this year, even as OPEC nations vowed to reduce output. The optimism from the U.S. shale fields followed quarterly reports last week that showed major international producers including Exxon Mobil Corp. and Royal Dutch Shell Plc are also learning to make money at $50 a barrel, less than half the peak that crude reached three years ago,” according to Bloomberg.
ETF investors interested in the oil exploration and production space have a number of options available, including the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEArca: IEO), SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) and PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEArca: PXE).
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While U.S. shale producers previously continued pumping in the face of low prices, the industry has recently revealed a spate of capital spending reductions, indicating still low crude prices are taking a toll. Low oil prices are also prompting speculation about credit downgrades for some exploration and production firms that already carry junk credit ratings.
“More worrisome perhaps for oil bulls, the U.S. drillers said they’re getting more efficient, allowing them to raise production goals without boosting spending. All five companies either cut or left flat their capital budgets for the full year,” reports Bloomberg.
The energy sector is the worst-performing group in the S&P 500 this year. Over the past week, IEO and XOP are down an average of 4%.
For more information on the crude oil market, visit our oil category.