Oil market bears argue that rebounding production in U.S. shale regions will add to the global glut of crude, slowing the rebalancing of the market. Don’t be so sure, say skeptics.

Production-rebound proponents argue that the recent rise in U.S. rig counts reflects a new reality in the oil market. In this scenario, the U.S. crude benchmark’s spring rebound, which saw prices push back above $50 a barrel by early June, and a continued fall in production costs were likely to entice previously hard-hit shale producers to reopen closed wells and rejoin the fray.

Oil futures re-entered a bear market this week on concerns about a global glut of crude and gasoline, trading below $40 a barrel earlier this week, but retook a chunk of lost ground Wednesday after government data showed an unexpected decline in gasoline inventories. Oil remains down nearly 2% for the week.

While bears have lots of ammo when it comes to global supply and concerns about the underlying health of the global economy. But naysayers argue that the data don’t bear out the bears when it comes to U.S. output.

“Interestingly, it seems that even if shale oil production costs have dropped significantly in the past few years, shale production remains down in all of the U.S. main producing regions—even in May, when prices were hovering in the upper $40s,” wrote analysts at Montreal-based Pavilion, in a Wednesday note.

The number of North American oil rigs has indeed tracked higher since bottoming out at 316 in late May, according to weekly data from oil services firm Baker Hughes. The rig count stood at 374 as of July 29. But that still compares with 664 rigs at the same time last year and more than 1,500 rigs in 2014 when oil was just beginning a long and painful rout that would take the U.S. benchmark from more than $100 a barrel to a 13-year low of less than $30 by last February.

Moreover, production in U.S. shale regions, after a stubborn delay, has fallen in reaction to the earlier drop in rig counts, analysts say, and is projected to decline further.

“The marked decline in U.S. shale production is being virtually ignored,” wrote Eugen Weinberg, the Frankfurt-based head of commodity research at Commerzbank, in a note earlier this month (see chart).



The Energy Information Administration is forecasting output from major U.S. shale regions to decline by another 99,000 barrels a day in August.


The Pavilion analysts said expectations for the earlier rebound in oil prices to boost production haven’t been borne out by employment data, which have yet to show a rebound in the oil and gas-extraction industry.

Also, capital expenditures, on both a trailing and 12-month forward basis, are still depressed, which doesn’t bode for a rebound in production next year, they said.

In that vein, the chart below from consulting firm Wood Mackenzie details second-quarter capex cuts across the major U.S. shale regions versus the same period a year ago:


And finally, producers still appear to be veering away from credit, leaving open questions about how they would fund an increase in drilling and pumping, the Pavilion strategists said.

So the world may still be awash in oil, but it isn’t clear that this year’s earlier rebound will be enough to prompt U.S. producers to twist open the spigots and guarantee a rerun of the rout that followed the 2015 spring rebound.