Oil prices soared to over $80 per barrel Tuesday boosted by rising natural gas and coal prices, but then reversed lower with the broader market. Unlike past crude oil rallies, analysts don't expect U.S. oil companies to boost drilling.
The U.K. and Europe are seeing a natgas shortage as suppliers were drained after a cold winter in 2020 and wind supplies weren't enough to cover the shortfall. China is clamoring for more coal to avoid power shortages.
The increased demand for natgas and coal could spill over into the oil sector as an alternative energy source and send oil prices surging. BofA analysts said earlier this month that oil prices could hit triple-digits in the next six months if there is a cold winter.
Brent fell 1% to $78.72 per barrel after hitting a nearly three-year high of $80 in early trading. U.S. crude dipped 0.8% to $74.86 after topping $76 intraday. Natural gas futures, up over 10% early Tuesday to their highest since 2014, climbed 3%.
"We are seeing structural issues in the underinvestment in traditional fossil fuels," Phil Flynn of the Price Futures group wrote in his morning note Tuesday. "That lower for longer for oil and gas was a false premise and that peak demand also will prove to be much further in the future than many had a year ago believed."
ConocoPhilips and Devon Energy rose slightly Tuesday, off intraday highs but extending recent breakouts and win streaks. EOG Resources and Pioneer Natural Resources edged higher, working up the right side of bases. But Denbury, a big winner for much of 2021, sold off hard after flirting with a new buy point for several days.
U.S. Producers Face Uncertainty
During Covid-19 producers scaled back drilling, then as demand for oil increased turned to finish drilled but uncompleted wells.
But rising oil prices won't be enough to spur U.S. independent producers to rapidly boost drilling after years of careful capital discipline.
Gabriele Sorbara, a senior equity analyst at Siebert Williams Shank & Co. expects U.S. shale oil companies to remain in "maintenance mode" in drilling and completing new wells to grow at low-single digits.
Despite the $100 oil price estimates floating around Wall Street, there remains uncertainty in the forward market, he said. Also, many U.S. exploration and production companies were forced to hedge when oil prices went negative last year, locking in contracts at much lower oil prices.
OPEC+ also remains a major variable.
"We've seen over the years that OPEC decides to wake up and start a war," Sorbara said recalling a contentious meeting over Thanksgiving weekend in 2014 that sent oil prices plunging.
Instead of ramping up new drilling, U.S. independent producers flush with free cash flow, will be focused on returning cash to shareholders or looking at making purchases to expand holdings, he said. ConocoPhillips scooped up Royal Dutch Shell's assets in Texas earlier this month.
COP stock rose 1.25%, while DVN stock gained 0.6%. Both are extended from buy points.
Meanwhile, EOG stock edged up 0.3% to 82.05 on the stock market today. EOG is working on an 88.09 buy point. Pioneer Natural Resources ticked up 4 cents to 168.06. PXD stock is working toward a 175.47 buy point, but it cleared a lowish handle last week. Continental Resources dipped 1,5%, but still extended.
Denbury stock tumbled 5.4% to 70.97, well below a 75.30 entry.
OPEC+ Meeting Looms
As U.S. producers remain disciplined, OPEC+, which includes the OPEC and top non-member producers like Russia, is slated to meet Monday to discuss its output quotas.
The oil cartel agreed in July to boost production by 400,000 barrels per day starting in August. OPEC+ plans to continue expanding at that monthly pace through September 2022.
But a slow and steady increase might not be enough.
The Biden administration called on OPEC+ in August to boost production to prevent oil prices from stalling the economic recovery. The current oil price surge could put even more pressure on OPEC+ to boost output.
"If momentum is sustained, pressure will grow on OPEC+ to speed up the pace that it increases output," Craig Erlam, senior market analyst at Oanda said in a note Monday.
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