Is this oil price rally to $50 a barrel legit or another false start?
Everyone wants to know: is this oil rally to $50 a barrel legit or another false start like last year?
The answer to that big question could lie in the Permian Basin, the West Texas oil play, where drillers can squeeze out profits even at low prices.
Now that oil prices have nearly doubled from their February lows, the key will be whether frackers in the Permian start pumping like crazy again. That’s what happened in early 2015, when oil prices had recovered a little bit. The extra pumping deepened the big supply glut and caused oil prices to eventually crash to a 13-year low of $26 a barrel.
William Thomas, CEO of oil producer EOG Resources (EOG), believes the industry is displaying a lot more “discipline” this year after learning some tough lessons from last year’s experience.
But even Thomas is worried about a repeat. “Our industry does have a bad habit of destroying capital,” he said at a Sanford Bernstein conference last week. “We need moderate growth of oil in the U.S. We don’t need a million barrels a day of growth.”
There are early signs that some U.S. oil companies are ready to pounce. For instance, last week Baker Hughes said U.S. oil rig counts jumped by nine — the biggest increase since December. And on Wednesday the U.S. Energy Information Administration estimated U.S. oil production rose by 10,000 barrels last week.
That makes sense since crude prices are already at or near the levels that some American oil execs have signaled they need to justify a resumption of pumping.
Last month, RSP Permian (RSPP) CEO Steven Gray called $45 a barrel an “inflection point” that would cause the oil producer to think about adding a rig.
Likewise, Pioneer Natural Resources (PXD) said it expects to add five to 10 horizontal rigs when oil recovers to about $50 a barrel — a milestone hit late in May.