US shale firms more exposed to falling oil prices as hedges expire

Demand grew 1 percent in 2016, roughly in line with the previous two years, but well below the 10-year average of 1.8 percent, BP said in its benchmark Statistical Review of World Energy on Tuesday. Early indications suggest that remains the case this month, one of the sources said.

Looking at anticipated growth in global oil demand this year, OPEC reiterated its forecast of 1.27 million barrels per day (bpd). That means that a lot of production in the United States fluctuates with price.

While this would not affect global inventories, restricting the amount of oil coming into the U.S. should theoretically bring down inventories in the much-watched market, if it weren't for Iraq's increased oil exports to the US.

OPEC's own compliance with the cuts has been questioned, and the producer group said in a report this week that its output rose by 336,000 bpd in May to 32.14 million bpd. Demand will surpass 100 million barrels a day for the first time in the fourth quarter of 2018.

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Last year, Saudi Arabia burnt 700,000 bpd of crude to generate power in the peak summer months. Up next will be the EIA inventory report at 10:30 a.m. ET. Output at major American shale fields will reach a record in July, according to the EIA.

According to the MOMR, US output is still expected to rise by 800,000 bpd in 2017, contributing nearly all the increased output by the non-OPEC members. Prices have averaged higher so far this year, at around $51.8 a barrel. In 2016, the top three crude oil producing countries were Saudi Arabia (10.46 mb/d), Russian Federation (10.29 mb/d) and the United States (8.88 mb/d).

Efforts to combat the oil glut have not been helped by figures this week that showed Opec as a whole increased production in May because of higher output by Nigeria and Libya, which are not covered by the recent cuts deal.

The Organization of the Petroleum Exporting Countries agreed to extend that deal that began in January through March 2018, but ongoing growth in US production, along with exemptions for non-members Nigeria and Libya, have offset those cuts to some extent.

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The pullback in hedging was driven by rising service costs and expectations that prices would continue to rally after the Organization of the Petroleum Exporting Countries extended those cuts in May, analysts said.

On the New York Mercantile Exchange, crude futures for July delivery fell 0.97% to $46.01 a barrel, while on London's Intercontinental Exchange, Brent eased 0.84% to $48.31 a barrel.

Michael Tran, director of global energy strategy at RBC Capital Markets, says prices are too low now for producers to lock in large volumes of future production, and pent-up demand for hedging will pressure any moves higher in the oil market.

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  • Kelly Blake