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Bad Year For Shale Stocks Despite Rebound

Bakken

Friday August 11, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Disappearing contango

(Click to enlarge)

- The oil futures market has been in contango pretty much since early 2015. A contango – when front-month oil futures trade at a discount to futures further out – suggests a state of oversupply.
- But the contango has narrowed substantially recently, with Brent tipping slightly into a state of backwardation – in which front-month contracts trade at a premium to longer-dated futures.
- The reason this is important is that the futures curve is telling us that the oil market is getting tighter. And the backwardation itself will help accelerate that tightening by taking away the incentive to store oil.
- Backwardation will also make hedging by shale players less attractive since 2018 prices could fall below today’s spot price.
- In summary, the sudden narrowing of the contango, and the possibility of backwardation, is a leading indicator of higher oil prices ahead.

2. Bad year for E&P stocks continues

(Click to enlarge)

- It has been a rough year for energy investors, and the poor performance of U.S. shale companies continues, with…

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