Rising oil price is a shot in the arm for US shale frackers

The US shale industry, gutted by nearly three years of bankruptcies, writedowns, credit downgrades and layoffs, is poised to step back from the brink, thanks to an old enemy: Opec.

Abandoning a policy that sought to starve shale explorers and other high-cost drillers into submission, the Organisation of Petroleum Exporting Countries relented this week and agreed to curb output by 1.2million barrels a day. Other producing nations that aren't cartel members also signalled plans to cut back by as much as 600,000 barrels, Opec said.

The deal could boost prices through at least the first half of next year, according to Chris Kettenmann, chief energy strategist at Macro Risk Advisors. The result: US shale fields could raise the amount of crude produced within four months, said Antoine Halff at Columbia University's Centre on Global Energy Policy. First to pounce should be drillers in the Permian Basin of Texas and New Mexico, home to gushers prolific enough to spur a recent land rush.

If the deal holds, "US oil production growth is all but guaranteed to return in 2017", said Joseph Triepke, founder of Infill Thinking, an oil research firm. "All US tight-oil plays will benefit, but none more than the Permian, where we estimate that as many as 150 rigs could be reactivated next year."

Crude prices soared as much as 10% in New York after the Opec agreement and investors pushed energy companies into the top 18 spots on the S&P 500 index, swelling the US oil industry's market value by $81.3-billion (about R1.14-trillion).

Some of the best performers were those hardest hit by the downturn that began in mid-2014 and accelerated five months later when Opec declined to reduce output. California Resources jumped by 44%, while Halliburton, an oilfield-services company, climbed as much as 15%, its biggest intraday advance since 2008.

Oilfield service companies that provide everything from $700-million floating rigs to the sand used by frackers have contributed the largest chunk of more than 350,000 oil-industry layoffs globally during the downturn. More than 100 oil-service companies in North America have gone bankrupt.

Shale pioneer Harold Hamm, an energy adviser to president-elect Donald Trump, predicted in 2014 that Opec would crack before the shale drillers. On Wednesday, Hamm found himself $3.1-billion richer as Continental Resources, the company he leads, soared 23% as his prediction came true.

"This is real and it is significant," said Andrew Slaughter, executive director of the Deloitte Centre for Energy Solutions and a former executive of Royal Dutch Shell. "Even if they don't deliver the full 1.2million-barrel cut, it accelerates the inventory drawdown."

Over the next few months, drillers will probably take advantage of the price bump, moving to lock in profits on future production with financial hedges, according to Halff, the director of global oil-markets research at Columbia and a former chief oil analyst at the International Energy Agency.

Not everyone sees only upside. Natural-gas producers may suffer, said Jason Schenker, president of Prestige Economics. As oil drilling ramps up, more gas will flow out of the ground along with it, he said, threatening to derail a rally that pushed US prices for the furnace and factory fuel to a two-year high.

"These guys will drill more, and you are going to get that extra gas at an inconvenient time," Schenker said. "It's bearish for US gas for the next three-to nine-month window."

Other analysts suggested Opec may have a deeper motive, pushing a bump now but looking to drive down the future price of oil. That would hinder shale producers from getting financing for drilling based on the prospect of rising prices, said Michael Roomberg, who helps manage $7.5-billion at Miller Howard Investments.

"The six-month term of the deal seems like a clever strategy designed to limit upside in the forward curve which will inhibit some market-share gains by US shale while at the same time increasing current Opec revenue," Roomberg said.

Others preached caution. Investors should avoid "sharp recovery hype", Matt Marietta, an analyst at Stephens, told clients in a research note.

"We reiterate our view that structurally oversupplied crude markets will take more time to balance," Marietta wrote. "The math suggests an ongoing imbalance is likely to persist well into 2017, even with an Opec cut, and no US growth."

The strength of the deal will also depend on whether all parties deliver on their commitment. Saudi Arabia and its Gulf allies, the UAE and Kuwait, have traditionally stuck to their cuts, but some others have not, particularly when prices are low. Any doubt in the market could once again see prices come under pressure.

Moody's for one isn't changing its oil-price forecasts for next year. "Opec agreements are difficult to implement and difficult to enforce," wrote Terry Marshall, a Moody's senior vice-president, in a report to investors.

Mostly, though, analysts outlined consequences from Opec's agreement that will be positive and vast. For the global energy industry, which has endured the most painful downturn in a generation, the deal means companies from Exxon Mobil in the US to Total SA in France may loosen their belt-tightening, while countries that depend on oil for revenue may finally see an end to their struggles.

Latin American producers including Colombia's Ecopetrol and Brazil's Petrobras will see pretax earnings rise 3% and 2%, respectively, for every $1 increase in oil prices, Bank of America Merrill Lynch analysts said in a note to clients. Canadian oil-sands producers, which have some of the most expensive production in the world, could also gain.

The Opec announcement "is certainly near-term positive", said Newfield Exploration's chairman and CEO Lee Boothby. "As you move up the price curve and you get more confident of the outlook for future pricing, we'll be able to add activity as cash flows grow."

— Bloomberg