Crude oil has not yet recovered from its worst crash in a generation.
But the price range that it has traded in for several months is proving to be a boon for US oil producers, which took several steps including job cuts to adjust to the lower-price environment.
“Energy is very much in a sweet spot for the economy and for markets,” said Randy Frederick, the vice president of trading & derivatives at the Schwab Center for Financial Research.
Prices are high enough that many producers can turn a profit and are not defaulting on their debt, both of which would affect markets, Frederick said. Energy earnings, for example, are expected to provide the largest contribution to profits growth, according to FactSet. Analysts think the sector earned $7.5 billion in the first quarter, compared with a loss of $1.5 billion a year ago.
Additionally, oil and gas mergers-and-acquisitions activity is more subdued than it was when several companies were on the verge of bankruptcy.
“If oil prices get too low, it’s a drain on the market, and if oil prices get too high, it’s a drain on the market,” Frederick said. “It’s now irrelevant, which is a good thing.”
With oil trading in a relatively stable range, US explorers have returned to continue flooding the market. The oil-rig count rose by 25% in the first quarter of this year, according to Baker Hughes, though it’s still well below its 2014 peak.
That’s just one sign of bullishness in the market, though it’s coming at a cost. For one, it’s keeping a lid on oil prices even though several members of the Organization of Petroleum Exporting Countries have pledged to pare back their contribution to the supply glut.
Also, more production is expensive. Schlumberger, the world’s largest oil-field-services producer, on Friday said the cost of reactivating equipment that had been idle weighed on its margins.
“In the first quarter, the North America land market continued to strengthen in terms of both activity and pricing, leading us to begin accelerating deployment of idle capacity for multiple product lines,” Schlumberger CEO Paal Kibsgaard said in the earnings statement.
But if oil continues to wallow in the range that it’s in now, US oil drillers can continue to raise their output for some time yet.
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