Tanker Attacks Lift Oil Prices, Improve Shale Producers' Outlook -- 3rd Update
By Ryan Dezember, David Hodari and Sarah McFarlane
Shale producers stand to benefit from the oil-market volatility unleashed by Thursday's attack on two oil tankers in the Gulf of Oman, as U.S. companies vie with the Organization of the Petroleum Exporting Countries for global market share.
The incident near the Strait of Hormuz, through which one-third of the world's shipped oil passes, highlights the risks associated with delivering oil from the Persian Gulf. Higher insurance and shipping costs could crimp margins for oil producers in the region compared with those in more stable parts of the world, such as the U.S. and the North Sea.
The attack also calls into question whether the supply forecasts that have weighed on crude prices recently accurately account for the potential for geopolitical turmoil. Shares of big shale producers rose on the news: Cimarex Energy Co. and Parsley Energy Inc., which drill in West Texas, added 4.2% and 3.1%, respectively. North Dakota-focused Hess Corp. climbed 2.8%.
"Escalating geopolitical tensions in the Middle East and dislocations in Venezuela and the brewing cauldron in Libya are reminders that security of forward supply feels increasingly fragile," said Bill Herbert, a senior research analyst at Simmons Energy.
Brent crude, the global benchmark, ended up 2.2% at $61.31 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures climbed 2.2%, to $52.28 a barrel. Both benchmarks were up twice as much earlier in the day.
The roughly $9 difference between the international and domestic benchmarks is largely due to the cost of moving U.S. oil to port and then on to international markets.
Some investors expect the spread to shrink later this year and in 2020 when new pipelines open between the prolific Permian Basin in West Texas with export terminals on the Gulf of Mexico. The new supply routes, including the 850-mile Gray Oak Pipeline scheduled to open before year-end, would enable much more U.S. crude to flow to global markets in direct competition with Middle Eastern crude.
Selling more oil at prices closer to the international benchmark would mean more cash in the pockets of domestic producers, which had a rare moment in the sun thanks to the fiery scenes in the Middle East. Shares of nearly every U.S. oil concern rose on Thursday and energy shares in the S&P 500 gained 1.2%, compared with a 0.4% uptick in the broader stock index. Most U.S. energy stocks have lost double-digit percentages over the past year, even as the S&P 500 has risen 4.2%.
Jay Hatfield, portfolio manager for the pipeline-focused InfraCap MLP exchange-traded fund, said he has been loading up the ETF with shares of Energy Transfer LP, Plains All American Pipeline LP and other firms that own or are building infrastructure that will handle increasing volumes of crude bound for international markets.
"U.S. production is extremely stable and the rest of the world is not stable," Mr. Hatfield said. "I'm 100% confident there's going to be production and delivery issues out of the non-Saudi OPEC countries."
A U.S. Energy Information Administration report on Thursday showed that crude imports from OPEC members plunged in March to 1.5 million barrels a day, the lowest level since the same month 1986. A decade ago, OPEC was supplying the U.S. nearly four times that.
The tanker attack came amid heightened tensions between the U.S. and Iran in recent months, with Washington ratcheting up sanctions on Tehran in early May with the aim of reducing the country's oil exports to zero. Secretary of State Mike Pompeo said Thursday afternoon that the Trump administration has concluded that Iran is responsible for the attacks.
Four vessels in the same region were attacked in May, which Washington also blamed on Iran. Iran denied involvement. Oil prices also rallied following those attacks, along with assaults on Saudi Arabia's East-West pipeline, although analysts said the geopolitical tensions were offset by concerns about a global economic slowdown and its impact on oil demand.
Thursday's rally marked a rebound from heavy selling on Wednesday, which followed the U.S. EIA's reduction of its oil-demand growth forecasts and bearish inventory data.
The attacks reversed that sentiment, though, and outweighed the effect of an equally bearish report Thursday from OPEC, which cut its 2019 forecast for world oil-demand growth.
Spiraling tensions between Middle Eastern oil giants will only intensify focus on the summit between OPEC and its allies, expected to take place later this month in Vienna. Producing nations will come to a decision on whether to extend their continuing output curbs into the second half of 2019.
Shipowners and insurance firms could raise risk premiums for their tankers used in the region given the recent attacks.
For now, analysts don't expect any significant change to trade flows, even if insurance and shipping costs were to rise after the latest incident, due to the potentially greater costs of finding substitutes to Middle Eastern oil grades shipped from the region.
"Unless you see concrete cost implications or disruption risk, because the alternatives are likely to be more costly or come with problems in terms of the quality differences, there's quite a high hurdle for buyers to make changes," said Richard Mallinson, analyst at consulting firm Energy Aspects.
Write to Ryan Dezember at email@example.com, David Hodari at David.Hodari@dowjones.com and Sarah McFarlane at firstname.lastname@example.org