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5% Drop in One Day Shows Fragility of Oil Price Recovery

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Oil prices fell 5% in a single day earlier this week, pushing the Canadian dollar to its lowest value this year, after the United States reported higher oil reserves than analysts and market-watchers expected.

The April crude contract lost $2.86 to settle at $50.28 US a barrel, its largest one-day drop in nine months,” CBC reports. “The stockpile figures come a day after Saudi Arabia’s energy minister said OPEC production cuts are working to bolster crude prices, but it hasn’t decided yet whether it wants to extend the cutbacks beyond this summer.

OPEC had spent months brokering a production cut among its members, aimed at reversing a fossil price crash that is now into its third year. But the fragility of that “recovery” has been reflected in the industry’s day-to-day obsession with fluctuating oil prices—and, now, in the ability of a single production report from the U.S. Energy Information Administration to pull the bottom out of the market.

“It is increasingly looking like U.S. production is recovering faster than expected,” Manulife Asset Management Managing Director Steve Belisle told CBC. “They’re drilling like never before and that is bringing production back faster than expected.”

Analysts initially expected a slower recovery on the part of U.S. shale operators, but “production is going through the roof,” Belisle added. “They didn’t need as much investment to jump-start production as before. That’s what has been surprising to the oil market in general.”

One advantage for shale producers, oilprice.com reports on The Energy Collective, is the production cost cuts of 30% in 2015 and 22% in 2016 that they achieved through “new drilling techniques, efficiency gains, and learning-by-doing.” But “some of the ‘efficiency gains’ could be temporary,” warns analyst Nick Cunningham.

As drilling picks up, the supply of oilfield services and equipment will tighten, putting upward pressure on the cost of contractors for oil producers,” he writes. One fossil business intelligence firm anticipates 10 to 15% cost inflation this year. Already, shale producers in Texas’ Permian Basin are having trouble attracting new employees, rig rental rates are rising fast, and the cost of frac sand for a single well could increase from $350,000 last year to $800,000 to $1 million in 2017.

The cost reductions since 2014 have been billed by the industry as monumental—putting drillers on sounder financial footing going forward, allowing companies to survive and thrive in a world of $50 oil,” Cunningham writes. But ultimately, “the longevity of the nascent shale rebound will be determined not in Texas, but in Vienna. If OPEC decides not to extend its production cut deal through the end of the year, oil prices could head down again.