OPEC’s Oil War Makes US Shale Producers More Competitive

US stocks rose on the last day of February on China’s move to boost its slowing economy and higher oil prices, putting the S&P 500 on track to post its first monthly gains this year. China’s central bank on Monday cut its reserve requirement ratio, or the amount of cash that banks must hold as reserves, for the fifth time in a year. WTI oil is trading at 33.81 while Brent oil soared to 36.64.

“It’s sort of like a sugar shock, a bump in near-term growth at the expense of longer-term credibility. I think investors are caught weighing the two,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

U.S. crude prices rose more than 3 percent after Saudi Arabia said it would work with other producers to limit oil market volatility. Strong data, including improving consumer spending trends, released last week suggested the U.S. economy was recovering better than expected, raising expectations that the Federal Reserve will hike rates this year.

Federal funds futures implied traders see a 38 percent chance of a hike in June and a 57 percent chance in December, according to CME Group’s FedWatch program.

Less than a year ago major shale firms were saying they needed oil above $60 a barrel to produce more; now some say they will settle for far less in deciding whether to crank up output after the worst oil price crash in a generation.

Their latest comments highlight the industry’s remarkable resilience, but also serve as a warning to rivals and traders: a retreat in U.S. oil production that would help ease global oversupply and let prices recover may prove shorter than some may have expected.

Continental Resources is prepared to increase capital spending if U.S. crude reaches the low- to mid-$40s range, allowing it to boost 2017 production by more than 10 percent, chief financial official John Hart said last week.

Rival Whiting Petroleum Corp (WLL.N), the biggest producer in North Dakota’s Bakken formation, will stop fracking new wells by the end of March, but would “consider completing some of these wells” if oil reached $40 to $45 a barrel, Chairman and CEO Jim Volker told analysts. Less than a year ago, when the company was still in spending mode, Volker said it might deploy more rigs if U.S. crude hit $70.

While the comments were couched with caution, they serve as a reminder of how a dramatic decline in costs and rapid efficiency gains have turned U.S. shale, initially seen by rivals as a marginal, high cost sector, into a major player – and a thorn in the side of big OPEC producers.

Investors around the world freaked out when oil prices plummeted to a 13-year low of $26.05 a barrel on February 11. But they are now sitting at $34 a barrel, marking an incredible 30% spike in the span of just 11 trading days.

The ridiculous surge from the recent lows reflects a swing in sentiment, even if it’s not a dramatic shift in the fundamentals. The world still has too much oil and U.S. production hasn’t slowed enough yet to ease the epic supply glut.

“Fundamentally, things are still extremely weak. It’s being driven more by hope,” said Matthew Smith, head of commodity research at ClipperData, which tracks global crude shipments.