Investors can be forgiven if they are more puzzled than ever regarding the trajectory of oil prices. The gyrations over the past month have induced a sense of deep despair, followed by a brief period of optimism, only for those hopes to be quickly dashed. With oil edging back up towards $50 again, there are likely fewer people than last month who are willing to buy into the notion that the rally is for real.
A dose of skepticism, in this market, is healthy. Some analysts predict prices will plunge well below $40 while others see them steadily rising to $60 or $70, but there is a much greater probability that oil stays stuck in its current range.
The extraordinarily rapid rise of U.S. shale production sputtered in June, even as the industry still appears to be expanding. The EIA reported one week’s worth of production declines, while the rig count contracted a bit before rebounding again. The data could be noise…but it could also be a sign that some of the weaker shale players are beginning to struggle with oil prices at $45 and below.
“If oil holds under $45, that would make a difference to us,” James Mayer, CEO of Green Century Resources, a small Texas shale driller, told the Houston Chronicle. Green Century might cancel or delay drilling plans if oil prices remain in the mid-$40s or below.
The same could be true for dozens of other companies. That means that if oil prices stay in the mid-$40s, or fall…