The slight bounce in the steps of oil and gas professionals last week can be traced to a nice bump in oil prices, which have risen to three-month highs for both Brent and WTI. Of course, several months ago very few industry people would have been excited at the idea of WTI sitting just above the $36 a barrel threshold as it is today.

The short-term excitement over rising oil prices should be tempered, however, for a number of reasons.

First, as we have discussed here in the past, oil prices are closely tied to the state of the U.S. dollar. Morgan Stanley has noted that "a large portion" of the recent uptick in oil prices was related to the depreciation of the U.S. dollar during that same time period.

Second, increased prices could signal an end to the decline in operating rigs in the U.S. and, concurrently, the decline in U.S. shale production. Bjarne Schieldrop, chief commodities analyst with SEB in Oslo was quoted on Yahoo Finance as stating: "We are now getting very close to where we could see the rig count ticking higher.... You're going have some headwinds in the oil price as soon as you see the rig count increase."

Last, a little-reported index referred to as the "Oil and Gas Liquidity Stress Index," a measure of the number of energy companies that are facing looming credit problems, hit its highest level ever last week according to Moody's. The steady rise in the index since November 2014 "signals that the default rate [among domestic E&P companies] will continue to rise as the year progresses." As Dave Forest from Oilprice.com succinctly put it, all of this "suggests there's a lot of pain to come in the oil and gas space. Watch for more defaults and bankruptcies coming in the E&P sector."

Higher oil prices are nice (even if natural gas prices continue to struggle). However, that light at the end of the tunnel ... it might be a train coming at us.
Source: Fox Rothschild LLP