Shale explorers have signalled they’re gearing up for a drilling surge in 2018.
The net-short position of swap dealers, an indication of hedging, increased for an eighth week to a fresh record, according to data from the US Commodity Futures Trading Commission on December 8. The rise suggests producers are finding the upper-$50-a-barrel environment a key time to lock in prices.
Meanwhile, money managers eased their bullish slant on West Texas Intermediate, with short-selling picking up the pace. After Opec extended output curbs through 2018, prices have failed to hold a meaningful rally as the US rig count continues to rise, shale output expands and gasoline stockpiles fill up.
Producers “are showing that they want to lock in their gains now and it sows the seeds for 2018 to be a well-supplied market,” said Tamar Essner, an analyst at Nasdaq Inc in New York. “What the rig count suggests and what the hedging suggests – the growth is going to be there.”
US drillers’ plans for 2018 don’t seem to involve much of a slowdown in shale growth, with Chevron Corp saying its spending on shale will rise 70% from this year. The latest Baker Hughes data show the oil rig count at the highest level since September, at a time when crude production sits at a record.
“The real uncertainty for the market right now is what does the Opec decision mean for shale producers? In a higher-price environment, the Opec agreement is going to inherently be less effective,” Essner said in a telephone interview. “The outlook post-Opec has been strangely fragile.”
Investors failed to see a strong follow-through after the November 30 meeting where the Organisation of Petroleum Exporting Countries agreed with other producers, including Russia, to keep output cuts intact through the end of 2018.
“We didn’t run up to $60 a barrel on WTI,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by telephone. Lingering concerns are over “US shale. That’s going to be the headline story.”
Swap dealers’ net-short position rose by 1% to 594,256 contracts in the week ended December 5, CFTC data showed. Money managers reduced their WTI net-long position – the difference between bets on a price increase and wagers on a drop – by 1% to 392,431 futures and options, with longs advancing 0.7% and shorts moving higher by 18%.
The Brent net-long position decreased by 0.7% to 534,234 contracts, according to data from ICE Futures Europe. Longs increased by 0.8%, while shorts jumped by 17% to the highest level in seven weeks.
A worker waits to connect a drill bit on Endeavor Energy Resources’ Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas (file). US drillers’ plans for 2018 don’t seem to involve much of a slowdown in shale growth.
