For the oil industry, $70 offers a test of wills. With benchmark U.S. crude prices crossing the $70 a barrel threshold on Monday, the shale drillers who helped upend global markets now face a new challenge: Do they stick with promises of fiscal discipline and avoid new production? Or is it time to turn on the taps and reap the benefits of the highest crude prices in more than three years?U.S. oil traded at $70.37 a barrel at 6:55 a.m. in New York as traders braced for a re-imposition of U.S. sanctions on Middle East crude producer Iran. In quarterly earnings reports over the last two weeks, producers have modestly upped forecasts for oil and gas output but also mostly kept drilling budgets flat, holding out hope they won’t completely undermine the rally. What do they do now? Here are three ways the industry could react:
Historically, shale drillers have ramped up output in response to the market, and there’s little reason to believe this time will be different. “It signals to drill. That’s for sure,” said Ashley Petersen, lead oil analyst at Stratas Advisors in New York, in a phone interview. “It definitely signals to them, take advantage of prices while you can.” Companies are also adding on new hedging contracts, locking in payments for future barrels that will sustain production even if prices slide again.