INVESTORS QUESTION OIL OUTPUT IN PERMIAN BASIN, AMERICAS FASTEST-GROWING FIELD
Increasing volumes of gas bubbling up from oil wells in the Permian basin could be a harbinger of waning crude production, writes The Wall Street Journal’s Alison Sider.
“Investors helped turn West Texas’ Permian Basin into America’s fastest-growing oil field, but their confidence is cracking over whether drillers can keep production rising. Questions mounted last week after Pioneer Natural Resources Co. reported that its Permian wells are producing more gas and natural gas liquids such as propane than expected. That worried investors, who care a lot more about oil,” the Journal reports.
Most wells produce natural gas as a byproduct alongside oil, and that gas output tends to rise over time. That is because as a reservoir is depleted, its pressure drops and gas vapors separate from liquid—reaching the “bubble point” at which natural-gas production accelerates.
Pioneer last week indicated that some of its Permian wells are reaching this point sooner than it anticipated. Pioneer’s shares and that of other drillers tumbled as a result.
A REASON TO CHEER AT OPEC
Lower crude inventory isn’t the reason for OPEC to be pleased with its efforts, but the oil futures curve may be, writes Spencer Jakab for Heard on the Street.
Last year the Organization of the Petroleum Exporting Countries made a deal with external producers such as Russia to eliminate about 2% of the world’s oil output in a bid to lower inventories and prop up the price of oil.
OPEC’s supply action hasn’t had the desired effect as measured by the price of the global oil benchmark. Crude futures are now almost at the same price as the day before exporters’ December agreement to cut output.
However inventories seem to be responding. Data from the U.S. Energy Information Administration continues to show surprisingly large draws on crude stocks. The latest official report showed a 6.5 million-barrel drop bringing stockpiles to levels 9% below what they were three months earlier.
But declining stocks aren’t the best measure of OPEC’s bid to balance the oil market, writes Mr. Jakab. Summer inventory drawdowns are rarely an indicator of future oil demand. In the autumn, when the number of miles driven drops and refineries go into maintenance, crude stockpiles tend to recover.
Instead the best measure of the oil cartel’s success can be observed in the crude futures market. “The price of futures contracts expiring in six months is barely higher than spot prices today, whereas they were substantially higher last summer. This reduces the financial incentive to buy a physical barrel, store it, and then immediately sell the same barrel on paper,” writes Mr. Jakab.
Oil futures rose on Thursday, building on overnight gains, after declines in U.S. crude inventories added to evidence that the world stock overhang is finally falling.
Brent crude, the global oil benchmark, rose 0.6% to an 11-week high of $53.03 a barrel on London’s ICE Futures exchange. The Brent front-month contract traded at a premium to the second-month, a market configuration known as backwardation, indicating a tightening in supplies available for immediate delivery.
On the New York Mercantile Exchange, West Texas Intermediate futures gained 0.4% to trade at $49.76 a barrel.