A buy signal for industrial metals and materials...and oil
March 28, 2024
Key Observations:
The marginal cost of capex for U.S. on-shore oil production has increased to $70 per bbl, according to the Federal Reserve Bank of Dallas. The fresh data are from a survey of 87 exploration and production firms (March 13-21, 2024). Current cost marks an increase of 6.1% from the level surveyed by the same source in the same week a year ago.
The oil-directed rig count in the United States stood at 509 on Fri. Mar 22, according to Baker Hughes. This activity marks an increase of 12 rigs since the recent trough at 497 as of Feb 16.
In tandem, these facts support the view that (a) the U.S. oil supply adjustment that began in December 2022 has ended, and (b) after a 15-month bear market, services firms are successfully pushing through price increases to improve their margins.
This is fresh cost-push inflation of expenses for labor and materials in a demand-led market. The cost of a steel oil drum has increased by 6.3% YoY but is still 2.8% below its level in Dec-22, when the price-driven slowdown in U.S. oilfield capex began. These are buy signals for metals.
Beneficial for: CHX, HAL, HP, NOV, CVE, FANG, CIVI, OKE, PAA, MPC, PSX, VLO, NUE, STLD.
Source: Federal Reserve Bank of Dallas, Baker Hughes, Blacklight Research. Note: size of bubble is scaled to number of responding firms per bucket, not quantity of barrels produced by region. Our own primary research on the cost curve by barrels produced arrives at comparable results.
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