2017/6/22 For Oil Investors, Early Faith in a Rally Begins to Wane - WSJ

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Crude-oil prices have declined almost 9% in the past three weeks, moving decisivelybelow $50 a barrel and forcing investors to reassess whether supply and demand willreach a more balanced state that can support higher prices.

Earlier this year, analysts and traders had projected cutbacks from global exporterswould clean up a supply glut and raise prices. Their confidence held up for the firstmonths of 2017, when oil was comfortably ensconced in a range between $50 a barrel

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OIL MARKETS

For Oil Investors, Early Faith in a RallyBegins to WaneCutbacks by overseas exporters to end supply glut have been undercut by U.S. producersramping up

An oil platform is temporarily stationed at Guanabara Bay in Rio de Janeiro on Thursday. PHOTO: YASUYOSHICHIBA/AGENCE FRANCE­PRESSE/GETTY IMAGES

June 9, 2017 6:44 p.m. ETBy Alison Sider and Timothy Puko

2017/6/22 For Oil Investors, Early Faith in a Rally Begins to Wane - WSJ

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and $55.

But crude prices have fallen 15% since the start of the year, as U.S. producers rushed tofill the gap left by the Organization of the Petroleum Exporting Countries. Major selloffshave become almost routine—with four one-day drops of more than 4.5% since March.

Crude prices rose 19 cents on Friday but dropped 3.8% this past week.

Coming into the year, “we had a strong view that prices were going to rally,” said EbeleKemery, head of energy investing at J.P. Morgan Asset Management. But around March,she said, her view started to shift. U.S. producers were ramping up more quickly thananyone expected. Expectations for strong demand growth were dimming. The bloatedstorage levels that OPEC aimed to drain remained full.

Now, Ms. Kemery expects prices to beeven lower in 2018 than today, unlessOPEC takes more drastic action. “TheOPEC cut—it’s almost like we need itjust to stand still,” Ms. Kemery said.

And standing still may be difficult. OPEC and other major producers, including Russia,announced last month that they would continue their output cut of 1.8 million barrels aday through the first quarter of next year. Prices dropped sharply that day and have onlycontinued to slide, reflecting disappointment among investors who had hoped that thegroup would agree to even deeper cuts or would articulate a strategy on ending cuts nextyear that would avoid flooding the market again.

Without those assurances, investors have become increasingly jittery, heading for theexits at any sign that global stockpiles aren’t shrinking. U.S. crude prices havelanguished below $50 since.

When government data showed this week that the amount of oil in U.S. storage tanksincreased for the first time in nine weeks, crude prices fell more than 5% Wednesday.

“People are starting to doubt it now. They look at the cuts and say, ‘Who cares?’ ” saidErnest Scalamandre, managing member at AC Investment Management LLC, whichmanages about $750 million in assets, primarily investments in commodity hedge funds.

U.S. production has also come back more quickly than many anticipated. The number ofrigs punching new wells in U.S. oilfields has climbed for 21 straight weeks. Some analystsnow predict that U.S. output will end the year as much as 1 million barrels a day higher.That’s a stark change from late last year year when banks such as Bank of AmericaMerrill Lynch were expecting U.S. output to rise more modestly, by some 660,000

RELATED

Heard on the Street: Producers of Shale Only Got Stronger

2017/6/22 For Oil Investors, Early Faith in a Rally Begins to Wane - WSJ

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barrels a day by the fourth quarter. Bank of America now expects U.S. shale output torise by 800,000 barrels a day during the same period.

Some were expecting that shale-oil producers would be constrained by rising costs, suchas hiring back workers who were laid off and expenses tied to repairing neglectedequipment. Meanwhile, such companies as Halliburton Co. and Schlumberger Ltd. thatdo the work of drilling and fracking wells slashed prices in the two-year downturn andhave been looking for opportunities to raise them.

But these factors don’t seem to be holding producers back, especially in places like westTexas’s Permian basin.

“People generally know where it is. Once prices are at levels that can support theexpense of actually drilling the well and getting the rig and starting production, it’sgoing to happen,” said Jason Thomas, director of research at the Carlyle Group .

Some say that the market has become irrationally negative. They say that investors areignoring signs that the glut is eroding—pointing to eight straight weeks of decliningstockpiles prior to the surprise increase reported this week. If oil prices do dropsignificantly below $45, even the most resilient U.S. producers could struggle to beprofitable.

“It might just be a knee-jerk reaction,” said John Groton, director of equity researchat Thrivent Financial. “We’ve got a view on where marginal costs need to go and

where OPEC countries need prices to be. That number does not start with a 4.”

Still, it wasn’t supposed to be this way. At the beginning of the year, analysts said OPEC’sagreement to cut production would cause oil supplies to tighten quickly. OPEC andshale producers looked like they had found a way to peacefully coexist after years ofbattling for market share.

Now they are back to being locked in a stare-down and nobody is blinking.

Even with prices down this year, U.S. oil producers appear committed to the growth theybudgeted for going into the year, said Scott Hanold, an analyst at RBC Capital Markets.

Executives at the bank’s energy conference in New York this week said they had lockedin high enough prices for their output in the futures market, and that their balancesheets were healthy enough to weather U.S. oil prices between $45 and $50, Mr. Hanoldsaid.

That isn’t a happy story for investors. Energy companies are the S&P 500’s worstperformers this year. Shares are down 12.3% in 2017, one of only two sectors in the redwhile the broader index has gained 8.6%. Telecommunications companies are down

2017/6/22 For Oil Investors, Early Faith in a Rally Begins to Wane - WSJ

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9.45% this year.

“Sentiment is now to the point where it seems like many are ready to give up,” Mr.Hanold said.

Write to Alison Sider at alison.sider@wsj.com and Timothy Puko at tim.puko@wsj.com

Appeared in the June 10, 2017, print edition as 'Oil Investors’ Early Faith In a Rally Beginsto Wane.'

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