The expansion in U.S. oil production, a major driver behind crude’s nine-month slide, is close to slowing, some investors and analysts say. That could spark a turnaround in prices that had tumbled as much as 59% since last June.
Signs of a slowdown in the pace of U.S. crude-oil output could come as soon as April. The Energy Information Administration, which collects and analyzes energy data for the U.S. government, in March predicted April’s production would decline month over month in three shale-oil-producing regions.
Although total output in the seven main U.S. shale-oil-producing regions is expected to rise in April, the EIA forecasts the smallest month-over-month gain since January 2011. If realized, such a slowdown would follow a steady drop in the number of rigs drilling for oil in the U.S. The number of rigs drilling for oil in the U.S. has plunged more than 40% since the start of the year.
But few investors are confident enough to call an oil-price bottom. Global demand for crude is likely to be tepid in April as refineries from the Middle East to Asia idle units to perform seasonal repairs, potentially forcing more oil into already brimming storage tanks. The amount of oil in the closely watched Cushing, Okla., storage hub is nearing maximum capacity. Cushing, the delivery point for futures traded on the New York Mercantile Exchange, was 80% full as of March 20, according to the EIA.
U.S. crude-oil stockpiles stand at their highest level in about 80 years, the EIA says. If storage continues filling up, that could spur another leg down for crude, as the number of buyers will dwindle because they will be strapped for space to stash the oil.
In the shorter term, “the market is hyperfocused on [U.S.] inventories filling up,” said David Zusman, chief investment officer at Talara Capital Management, which oversees about $400 million. “But the bigger story is the decline in rig count…and the likely decline in the rate of change in production that should be evident by the end of the summer.”
Talara has been adding exposure to energy stocks and bonds, Mr. Zusman said.
Benchmark U.S. crude-oil prices were set to log a decline of 8.6% in the first quarter, settling at $48.68 a barrel Monday on the New York Mercantile Exchange. Brent, the global benchmark, settled Monday at $56.29 a barrel on ICE Futures Europe, putting it on track for a 1.8% quarterly decline.
After losing half their value in 2014, oil prices somewhat stabilized in the first quarter due to winter demand for heating fuels and signs that oil companies were drilling less in response to low prices. But prices resumed their fall in March as traders focused on record crude supplies in the U.S. and ever-growing production.
U.S. refineries are expected to process more crude in the second quarter as they complete seasonal maintenance, and a busy period of summer driving should help keep a lid on stockpiles. U.S. refineries processed roughly 15.5 million barrels of crude oil daily in the first quarter, according to the EIA, compared with a five-year average of 14.5 million barrels a day for that quarter.
But global demand may not bounce back because maintenance season for some plants outside the U.S. lasts well into the spring. London consulting firm Energy Aspects expects global refineries to process 76.8 million barrels a day of crude oil in the second quarter, down from 77.1 million barrels a day in the first quarter.
“The storage numbers are very dramatic,” said John Pickart, a portfolio manager at the $57 million Franklin Pelagos Commodities Strategy Fund, which has less money invested in crude-oil futures than is recommended by its benchmark. “At some point, the lower rig counts are going to affect the trajectory of the production numbers, and eventually production will come in balance with demand. But in the near term, we have some issues to work through.”