Twilight of Shale: Bulls Hold Near-Term, But Inventories Flag October Headwind

Macro

Oil extended gains into late September, but the risk-reward is getting tighter. The Dallas Fed’s Q3 Energy Survey—covering 139 firms (93 E&Ps, 46 services) from September 10–18—shows rising cost pressure (F&D up to 22.0; LOE up to 36.9) and broad caution, with roughly four in five firms delaying investment decisions amid price and cost uncertainty. At the same time, speculative length has been trimmed while commercials absorbed flow, pulling the spec long/short ratio down toward ~1.6 from the ~2.0 range seen since 2023. Global onshore inventories are edging back toward five-year norms—most visibly in the Middle East—just as seasonal refinery runs increase into year-end. The setup remains tactically bullish, but early-October headwinds are forming.

‘’’We have begun the twilight of shale. Several multibillion-dollar firms that have previously been U.S.-onshore-only are making investments in foreign countries and riskier (waterborne) geologies. The writing is on the wall. Consolidation continues; 50 percent fewer public companies than 10 years ago, and employees are being cut by the tens of thousands. The U.S. isn’t running out of oil, but she sure is running out of $60 per barrel oil. $100 per barrel? $150 per barrel?

Price likely must cover for less-than-optimal geology over time. One must wonder—in a country with over a million orphan wells—what happens to that (expensive) plug and abandon liability from the 200,000+ horizontal shale wells over time. We already see some companies that appear to have a business plan of a “bad bank.” Society will not treat us kindly unless we do our part to clean up after we are gone’’.- Dallas Fed respondent, Q3 2025 report.

Articles

• Dallas Fed Survey Q3
• Video: The bull turn in oil perception
• Marginal cost of U.S. shale to move from $70 to $95 WTI by mid-2030s
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• Russian Troops Creep Through Empty Gas Pipes to Hide From Drones

Dallas Fed takes

See also my March report- Dower Dallas.

Data were collected September 10–18, and 139 energy firms responded. Of the respondents, 93 were exploration and production firms and 46 were oilfield services firms.

• Among E&P firms, the finding, and development costs index increased from 11.4 to 22.0. Also, the lease operating expenses index increased from 28.1 to 36.9.
  

When firms were asked-’’Has your firm delayed investment decisions in response to heightened uncertainty about the price of oil and/or the cost of producing oil?’’ 80% of respondents responded Yes-slightly to significantly.

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Refinery attacks continue at an elevated pace on Russian refineries. This is now starting to affecting the broader OPEC+ refinery capacity.

Source: Kpler

General market dynamics

The spec have been lifted. As we saw in last week’s report, specs flattened out approx 13,000 short contracts while commercials boosted purchases WoW. To add to this upside pressure, Russian refineries continued to come under attacks. The knock on effect was that they are looking at extending their export ban on gasoline.

Source: NewSquawk Oil report subscribers get a NewSquawk discount, so send me a message if signing up.

Added to this, the Dallas Fed Survey was not painting a sunny picture for Northern American drilling. Clearly a problematic production picture going forward for Donalds drillers. Back in March, we could see steel tariffs were just the start of major trouble. Dower Dallas.

Abandoning oil, means higher oil price.

Net-zero targets do not mean oil goes to zero, quite the opposite. A lower western demand has been confused with a lower global demand. Increased consumption for transportation from India and the awakening African continent, is the replacement demand G8 countries (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States). But the dynamics are simple.

Less production investment = production declines.

Less E&P = Lower workforce/lower resources available.

Lower resources= Higher production cost

50% of global oil final use goes to transportation.

Inventories

There is a point in early October where I will turn bearish on oil. I am starting to see the signals for this in the inventory charts as below. Each chart is interesting. Starting with Global onshore back to the 5-year average levels from being low in the range all this year.

OPEC+ Production hikes, while a great soundbite and bearish, They are only now starting to really build stores. Back to 5yr average levels. Again, for the first time all year.

US Inventories remain extremely low, with drillers running tight flows in fear of sub $60 WTI.

Stocks at refineries around the world are relatively low in the 5 year range. Seasonally, we are about to enter a strong refinery run period to Christmas.

Here is the bearish green shoot.(I am bullish all the way to end of September and first few days of October. Global crude in tanks is starting to build over the 5year average. One to watch, which will no doubt build through the next 3 weeks. At some point in the near future, this will be a headwind to price. Add to this the builds we also see in utilisation of onshore storage in the 2nd chart below. This will build a headwind momentum.

China continues to build, with mild slowing over Q3.

Builds also starting at 5year average in The Middle EAst, where we have been largely outside of the 5year range low for the year. An acute pickup in inventories. No doubt to replace Russian embargoed oil.

Commitment Of Traders Report

• Open interest down -25,930
• Commercials Long +14,158
• Commercial Short +18.099
• Non Comm Long flattened -13,467
• Non Comm Short flattened -17,716

The Specs have flattened out on both sides, with Commercials soaking up all of that supply. The lifting of the specs is in full flight. It is interesting (and makes perfect sense) to see the Spec ratio of Longs to shorts drop by half since the end of the 12 day war.

But what is more interesting is that the ratio of long to short specs has crashed below the general 2.00 range low observed since 2023. Telling that specs were happy to maintain a ratio (spread) of 2 long contracts to every 1 long. This has now shifted over the last 2 weeks to below. Currently, at a ratio of 1.64. What does this mean? Specs are happier to maintain a more equal weight hedge, rather than a generally bullish (overweight long) position.

Specs Long /Short ratio look back.

Closer look at Specs Long /Short ratio

Commercials

Commercial long crowding is pretty high. Reading 96.6% on all time observations.

Commercial long crowding- all time.

If we observe a 5year lookback. They are at 95% crowding.

So the net takeaway here is Commercials are very long. They can continue to build from here, but only by about another 100k contracts on the long side.

Non Commercials/ Specs

Observing this on a 5yr look back, Spec have retreated over the last 2 reports, from 97.7% to 85.8%

crowded short. The squeeze was real. I dont expect this short positioning to fully unwind over the next couple of week. I am looking at Commercial longs as the driving force and they will start to stop buying soon.

TRADE

Its been a great week last week for the desk. The specs got lifted, price was a healthy +5.32% / $3.32. I have taken profits into these highs and willing to scale back into deep value intraday dips. Have a look at the gains from just one of the spreads we were trading in Duggan Capital. A +780% lift over the 3 weeks.

I am now turning slightly bearish on time spreads. The only thing that can negate my bearish technical view is a headline macro driver. Increased war risk, damage to major refineries-not just Russian ones – think Saudi, US etc.

Front month WTI. QVWAP

If we zoom in on the 30min bars, we can see there are 2 key spots the bulls will make their stand this week. If they dont control at these areas, I feel we can go bearish.

Trade at the $64.96 level would be that deep pullback for me to like increased exposure to front month price and value on time spreads.

We can not ignore the price action observed on weekly bars here. Particularly the selling from the green uptrend which was broken in August. Price can not gain enough escape velocity to sustain daily closes above here i.e price acceptance. So be careful with continued longs. Seasonally, the market is entering a turnaround phase and shorts will be rewarded over the next 20 trading sessions. The questions is, will that be from higher levels than last weeks close? Or from today’s open?

WTI Front month, Weekly bars.

Thanks for reading.