Domestic crude lands above $38

U.S. crude climbed nearly 6 percent Wednesday, erasing two days of losses and edging closer to prices analysts say could keep the nation’s oil production from falling as steeply as projected.

Traders pushed the domestic oil price above $38 a barrel after a top Qatari energy official announced that OPEC and some ri- val oil-producing nations would meet on April 17. Citing OPEC sources, The Wall Street Journal reported that the countries would agree to limit oil production even without Iran’s cooperation. The Federal Reserve’s decision to not raise interest rates also propped upthe oil market.

But the recent oil price rally has unleashed new sources of cashandprotec-

tion against low prices for the U.S. oil industry, just as banks prepare to cut up to $15 billion in credit lines this spring.

“They’re looking at every place they can to find money,” Jamie Webster, an oil market analyst at IHS, said Wednesday on the sidelines of the consultancy’s World Petrochemical Conference in downtown Houston. “Generally what you see is if producers have the money, they drill.”

So far this year, stock market investors have poured nearly $10 billion into U.S. oil companies in a series of recent stock sales. Oil hedging — deals that lock in higher prices for future production — are “already rampant,” according to Morgan Stanley. Exxon Mobil Corp., Conoco Phillips and Anadarko Petroleum Corp. have tapped debt markets for a combined $18 billion. And debt from private equity firms is starting to replace bank debt for some U.S. companies.

Hedging has recently reached a new high since January, data from the U.S. Commodity Futures Trading Commission shows. That could fix some balance sheet problems, give some drillers access to capital markets and prompt others to finally pump crude from wells they’ve drilled but left offline, Morgan Stanley said.

“Higher crude prices and hedging can ultimately slow the U.S. production decline,” Morgan Stanley said. “Hedging could keep supply more stable and less responsive to prices, just as excitement about declines was building.”

Some oil companies, faced with high debt burdens, have been forced to lock in prices for theoil they produce. But other healthy midsize and large drillers in the Permian Basin — the last U.S. shale play to stall out— have also hedged.

And some could turn on drilled-but-uncompleted wells. Goldman Sachs says the dormant wells could produce 620,000 barrels a day for six months if they were all brought into production at the same time, though others say the num- ber of wells in inventory has been over-counted.

In recent weeks, some oil company executives have said any additional cash flow they get from a price recovery or hedging would in all likelihood be used to improve their balance sheets or protect against falling prices.

“But just because they say they’re going to do that doesn’t mean they’re actually going to,” said James Sullivan, an analyst at Alembic Global Advisors in New York, adding that they they could put their drilled but uncompleted wells back to work.

In a conference presentation on Wednesday, Webster said access to capital has become the most important leading indicator of U.S. oil production, and break-even cost in the various U.S. shale plays — usually the biggest consideration for U.S. companies — is becoming less relevant. Conventional wisdom is U.S. oil producers won’t start drilling at current prices because it’s too expensive: It takes $45 to $50 a barrel to break even in most shale plays.

But Webster said it would take some $50 billion, or oil prices of about $44 to $45 a barrel, for U.S. producers to keep the nation’s oil production flat. IHS believes U.S. crude production will fall this year and drain the global oil glut by the second half of the year, though Webster said there’s a risk that the recent oil price rally will keep U.S. output from falling enough to realign global supply and demand. If that happens, oil prices could fall further.

“The $26 a barrel we experienced in January is actually going to seem like a pretty high price if this happens,” Webster said. But Webster expects oil traders, unlike last year, to recognize they need to keep prices low to rebalance oil supply and demand, and that the rally will fade.

Crude prices climbed $2.12 on Wednesday to $38.46 a barrel on the New York Mercantile Exchange. Global benchmark Brent jumped $1.59 to $40.33 a barrel on the ICE Futures Europe, closing in on levels that analysts say are “selfdefeating.”

“In 2016, any sustained rally above $45 should be self-limiting, because if that happens, U.S. shale producers would increase spending, drilling and — after a time lag — production,” Michael Wittner, global head of oil market research at the French bank Société Générale, said in a note to clients. “In recent weeks, prices appear to have gotten ahead of themselves.”

Allen Gilmer, co-founder and CEO of Drilling Info, says the uptick in prices may be too late to matter this year, though it will affect U.S. oil production in 2017. The nation’s active rig count is below levels that have been recorded since the 1940s, according to Baker Hughes. It took several months for U.S. production to start declining even after the rig count fell precipitously last year.

“This boat takes six to nine months to turn,” Gilmer said.