U.S. oil prices are heading into a sweet spot that could spur the fracking industry to crank up some of the drilling it shut down when crude prices collapsed.
West Texas Intermediate oil futures for June rose above $60 per barrel Tuesday for the first time since December. That sparked expectations the price could go even higher, if U.S. oil inventory data Wednesday show an expected draw down in oil stored at the Nymex physical hub in Cushing, Oklahoma.
"If oil prices stabilize above $60, I believe we are going to resume production growth in the second half of the year. More companies will drill more wells," said Fadel Gheit, senior energy analyst at Oppenheimer.
WTI and Brent crude, the international benchmark, rose as protests stopped oil flows to Libya's eastern port and Saudi Arabia raised the official selling price for Arab Light grade crude to the U.S. and Northwest Europe. Brent was above $68 a barrel for the first time since December.
But price gains should be capped by any increase in output so oil prices may not go much higher for now. "Any increases in oil prices will bring more oil production, and it will dampen any price increases. Every time more production comes on, it is self-fulfilling. ... It will douse it and cool it off," said Gheit.
Oil prices collapsed earlier this year after the Organization of the Petroleum Exporting Countries decided last November to let market forces determine the price of oil. Saudi Arabia made clear it would not cut its production while other higher cost producers, like the U.S. shale industry, continued to drill at full throttle.
Since then the Saudis have upped production to 10 million barrels or more a day, and U.S. oil production rose, then plateaued at around 9.3 million-9.4 million barrels a day. No change in OPEC policy is currently expected.
On Tuesday, Saudi Arabia oil minister Ali al-Naimi said he was not concerned by oil prices and that he was "not worried at all" about the prospect of Iranian crude coming back onto the market if sanctions on Iran are lifted as part of an international nuclear deal.
The U.S. industry, meanwhile, could be quick to gear up for a "fracking counterattack," said Andrew Lipow of Lipow Oil Associates. Lipow noted the forward futures show prices out in 2016 and 2017 to $65, $70 per barrel. "A lof of these frackers are thinking, 'Maybe I should hedge out in those years and start bringing rigs back on line at the end of 2015," he said. "I think anything over $60 is getting them interested in the Bakken and Eagle Ford."
The U.S. oil rig count fell to 679 as of last week, down from 1,527 at the same time last year. Besides shut-in wells, the industry could quickly get hundreds of of semicompleted wells up and running.
"This rally has been predicated in large part by the declining rig count impact on production. If we actually see production stabilize at around 9.4 million barrels a day, that's going to be bad news for the oil market because the producers were able to combat the decline in prices with better production efficiency and use of technology," Lipow said.
The fracking industry came under criticism from investor David Einhorn, chief of Greenlight Capital, on Monday at the Ira Sohn Conference. He described Pioneer Natural Resources as the 'mother fracker,' and "A business that burns cash and doesn't grow, (that) isn't worth anything."
Einhorn said investments in Pioneer Natural and other shale drillers could "contaminate oil portfolio returns." Pioneer Natural shares fell, and dropped again Tuesday, ahead of its after-hours earnings release.
Gheit said Pioneer, and EOG, another company Einhorn criticized would be the first to resume some drilling. He said companies like those two, with low breakeven points, will immediately bring rigs back on line. The S&P energy sector was the only major sector trading higher on Tuesday.
Dennis Gartman, publisher of the Gartman Letter, said he disagreed with Einhorn's assumptions that the forward curve of the futures market is saying prices are expected to recover to about $63 per barrel next year and $68 in the long term.
"That is not at all what the market is saying; it is instead saying that there is a large supply of crude oil available to the market; that crude is being paid to go into storage and that either supplies are far larger than needed or that demand is weaker than thought," wrote Gartman.
While some analysts do believe oil could see another low, crude futures have been firming since WTI futures hit a low of $42.03 barrels a day in March.
John Kilduff of Again Capital said WTI oil could top out near term at about the $63 per barrel. The price has benefited from a geopolitical premium of about $8 to $10 per barrel, due in part to concerns about Yemen.
"It's been a strong rally for a month or two now. There's some technical buying and continued nervousness. The EIA report will show a draw down at Cushing. That's getting attention.," Kilduff said, referring to the Energy Information Administration. Cushing storage has been getting closer to capacity due to high U.S. production, and analysts had been concerned cheap oil would flood the market if it reached capacity. A reversal of that trend would be supportive of prices.
Kilduff also said continuing tensions with Iran in the Persian Gulf is a positive for prices. "There's tension there. That could turn into a shooting situation quickly. Now U.S. Navy ships are escorting British flagged ships" in the Strait of Hormuz. "That's anxiety inducing."
Wednesday's EIA data also could be market moving. Kilduff expects a draw down in Cushing but a build of 2.4 million barrels in U.S. oil supply.