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Will Higher Prices Kick Shale Production Back On?

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With the American crude oil benchmark West Texas Intermediate settling at its highest prices since the end of last year, some people are asking if oil companies that had previously shut in their wells may open up production as prices rise.

The International Energy Agency said that while U.S. oil production is estimated to fall by 600,000 barrels a day in 2016, the recent rise in prices may bring more production online. These would come from already drilled and fracked locations where production has been halted, or by locations that were drilled and not fracked as exploration and production companies wait for prices to rise.

A recent FuelFix article added that Morgan Stanley has seen a steep uptick in hedging, a practice where oil producers sell future production for higher prices to try to lock in rates. While the investment firm predicted that may help some companies with their current cash flow issues, it may also stem the tide of recovery as more oil flows into an already oversaturated global energy market.

In addition, the most recent Baker Hughes report released March 18 showed that oil drilling rigs, which had fallen for 12 consecutive weeks, had added a single rig.

Natural gas rigs continued to fall.

While the stop in the fall of oil rigs may be temporary, that combined with rising prices may have some exploration and production companies itching to return to the oil patch to drill more holes.

Many have worried that oil prices fluctuating up may spur a rapid increase in U.S. oil production, which under current conditions would risk any price rally. Other oil producing countries such as those in the Organization of Petroleum Exporting Countries and Russia have as of yet refused to reduce their production, which is already at near-historic levels.

A meeting set for April between Russia and OPEC members to discuss a production freeze has left some with hope that some sort of stability could come to the energy market. But without Iran, which recently emerged out of economic sanctions and is poised to increase its oil production by at least 500,000 barrels a day this year, it is hard to say how effective – or conclusive – such talks will be.

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