Shale Comeback Could Affect the Energy Sector

After having a forgettable year in 2020, the Energy sector has outperformed all 11 U.S. business sectors this year. The Energy Select Sector SPDR ETF (NYSEARCA: XLE) is up 41% year to date, compared to the S&P 500’s 11 percent rise. Oil prices have appeared to have stabilized in the upper $60s, with WTI finding support around $63 per barrel and Brent around $65 per barrel.

The revival can be attributed to a solid Covid-19 vaccine rollout and the steady recovery of the global economy, with many nations, including the United States and most of Europe, reopening their economies. But even more critical is OPEC’s continued supply restraint, with the group sticking to earlier plans to gradually increase output at its most recent meeting.

OPEC+ has reduced production by about 8 million barrels per day (BPD) but has now agreed to reintroduce 2.1 million BPD from May to July, easing the cuts to 5.8 million BPD. Experts are now warning that OPEC+, which accounts for more than a third of global demand, may be thwarted by a major competitor: U.S. shale.

According to the authoritative Oxford Institute for Energy Studies, rising oil prices could make a substantial return of U.S. shale to the market in 2022, potentially disrupting the delicate rebalancing of the global oil market.

The institute sets out several possibilities, some of which may result in an oil surplus. OPEC+ recently stated that it expects global oil demand to rise by 6 million barrels per day in the second half of the year. It predicted that stocks would be around 70 million barrels below average for the entire year of 2021, up from its previous estimate of 20 million barrels below average.