Oil Prices Fell 12% Last Week. How Little You've Heard About It Shows How Much Has Changed

Crude oil prices tumbled 12% to $47.72 a barrel for the week that ended March 14. While there are a lot of variables affecting oil prices, this drop didn't produce significant slides in prices of other assets, showing oil and much of the global economy appear closer to an equilibrium.

"Last year oil was being viewed as a global growth metric, which it's not anymore," said Priya Misra, head of global rates strategy at TD Securities.

Falling oil prices last year upset global equities, led to a rout in the high-yield bond market where many shale producers had borrowed, weighed on the pace of worldwide growth and contributed to the Federal Reserve's decision not to raise interest rates at the beginning of 2016.

One big sign the turmoil has abated: oil wasn't an issue with the Fed as it raised interest rates March 15. And while falling prices did mean energy companies needed to offer higher yields to attract bond investors, the moves this year have been mild. Investment-grade energy companies are paying 1.16 percentage points above comparable-maturity Treasuries, up from 1.10 percentage points on March 2, which was the lowest gap since 2014. In the high-yield market, the spread rose to 4.04 percentage points from 3.66 percentage points, also the lowest since 2014.

While the move to a wider yield gap versus Treasuries does reflect some heightened anxiety, it pales in comparison with last February, when oil fell below $30 a barrel. The premium for investment-grade energy debt widened to 2.24 percentage points and to 8.73 percentage points for junk issues, as the collapse in oil prices led to problems for shale producers who couldn't drill profitably at lower prices, Bloomberg data show.

What's different now is that "OPEC has gotten the memo," said James Sarni, managing principle at Payden & Rygel. The 13-nation Organization of Petroleum Exporting Countries agreed Nov. 30 to curb production by 1.2 million barrels a day through the end of June. Michael Wittner, global head of oil market research at Societe Generale, said he thinks OPEC will extend its agreement through the end of the year, which would help bolster prices.

He forecasts a return to $55.50 a barrel for West Texas Intermediate crude by the end of June.

Prices have taken a hit as inventories in the U.S. have surged. One factor in that rise is it takes at least six weeks, and often longer, for oil pumped from the middle east to reach the U.S., meaning crude inventories are only starting to reflect the production cuts that took effect at the start of the year, Wittner said. In addition, U.S. refiners are undertaking planned maintenence of their facilities, which is boosting the accumulated back-up of crude supplies. This helped push closely-watched crude inventories above expected levels, leading to some of the sell-off.

There's also been a steady surge of horizontal-drilling oil rigs typically used by fracking outfits, with 639 as of March 10, up from 314 last May, according to data gathered by Baker Hughes.

Shale producers appear well-hedged, are probably profitable when oil is $45 a barrel or higher, and are under no obligation to cooperate with OPEC's attempts to prop up prices, said Michael Cohen, head of oil strategy at

Barclays, who views oil's drop in prices as temporary. "Shale producers individually aren't going to care whether they are being disruptive," he said.

Yet, after the last year's carnage where prices fell to the lowest levels since the 2003 Iraq War, Payden & Rygel's Sarni thinks producers are going to tread a little more carefully. "If they start priming the pump and flooding the market, they're shooting themselves in the foot," he said. Even as energy issues account for about 16% of high-yield indexes, "I'm not worried about widespread credit problems."