Oil markets strengthen as U.S. shale struggles

West Texas Intermediate (WTI) rose to its highest level in more than a month last week, hovering just around $50 per barrel. Brent surpassed $55 per barrel, the highest level since the beginning of the year.

Strong demand combined with easing fears about hurricane disruptions in the U.S. has pushed oil up this past week. Plus, another missile launch from North Korea kept the markets on edge.

The IEA published an encouraging Oil Market Report last week, noting that global oil supply contracted for the first time in months while demand remains very robust. The Paris-based energy agency said that oil demand growth could hit 1.6 mb/d this year, an upward revision from the 1.5 mb/d estimate last month.

Refined product inventories are also nearing the five-year average level, a sign that the oil market is making a great deal of progress towards rebalancing. The report also dismissed fears that the hurricanes in the U.S. would dramatically reduce demand – the agency said any effects will be “short-lived.”

While OPEC members have cut some 1.2 million barrels of production over the past year (plus a little less than 0.6 mb/d from non-OPEC members), that has not actually translated to the same reduction in exports.

In fact, oil exports from the participating countries remain elevated, undercutting the efficacy of the agreement. The Wall Street Journal says that although OPEC agreed to cut output by 1.2 mb/d, exports have only declined by 213,000 bpd, as countries sell product from storage or otherwise reduce consumption to leave more oil for export.

  Jim Chanos of Kynikos Associates is shorting U.S. shale companies because he says they are much weaker than the market realizes. “In our view, people have been looking at this industry through the rose-colored glasses of Wall Street. And this is the inherent problem with the North American shale business,” he said at a CNBC conference .

Chanos said that around three dozen shale drillers will see their earnings eaten up by spending this year, leaving them struggling to pay off debt. He argues that many drillers will never escape this debt treadmill. He also argues that the excessive focus from Wall Street on EBITDA figures obscures deeper financial problems in the shale patch.

“This has attracted a lot of capital on the Street, in private equity and elsewhere, and we still think they’re being mesmerized by a metric that is going to lead to problems for returns on capital in this industry,” he said