Rig Count Rises by 10, Huge Short Covering in Crude Market

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In the week ended August 19, the number of rigs drilling for oil in the United States totaled 406, up by 10 compared with the prior week but down from a total of 674 a year ago. Including 83 other rigs drilling for natural gas and two rigs listed as “miscellaneous,” there are a total of 494 working rigs in the country, up by 10 week over week and down 394 year over year. The data come from the latest Baker Hughes Inc. (NYSE: BHI) North American Rotary Rig Count released on Friday.

West Texas Intermediate (WTI) crude oil for September delivery traded up about 0.7% on Friday to settle at $48.57, up about 9.1% for the week. The U.S. Energy Information Administration (EIA) reported last Wednesday that crude supplies had decreased by 2.5 million barrels in the week ended August 12 and that gasoline supplies had dropped by 2.7 million barrels.

Crude prices posted a big gain last week, primarily the result of talk that OPEC would agree to a production freeze at its September meeting in Algeria. Exactly what impact that would have on global crude prices is unclear because Saudi Arabia is already producing at near-record levels and freezing output at its peak is unlikely to have much impact, especially with the summer driving season about to end.

The likelihood of a freeze drops further when we consider that Iran already has indicated that it is unwilling to slow production until it reaches 4.0 million to 4.2 million barrels a day. That hasn’t happened yet. In July the Islamic Republic produced about 3.6 million barrels a day.

On top of that, U.S. onshore rig counts continue rising, and that indicates that more production from the nation’s shale plays could be coming. At $50 a barrel, many producers can break even and a few can even make a profit. And with U.S. export regulations now loosened, that increased production could find its way to overseas markets relatively quickly.

In short, has anything changed that would change the minds of OPEC’s ministers? The cartel has refused nine times to freeze or curtail production since 2012 and, in the same period, never once agreed to slow production. The odds for a freeze now are not good.

The number of rigs drilling for oil in the United States is down by 268 year over year but up by 10 week over week. The natural gas rig count remained unchanged at 83 but still is down by 128 year over year. Natural gas for September delivery closed the week at $2.57 per million BTUs, down about two cents compared with the prior week.

U.S. refineries ran at 93.5% of capacity, a week-over-week increase of about 268,000 barrels a day. Imports fell by about 211,000 barrels a day, to 8.2 million barrels a day in the week.

Hedge funds — under the Managed Money heading in the Commodity Futures Trading Commission (CFTC) weekly Commitments of Traders report — shed 56,880 short contracts for WTI crude oil last week and added 1,713 long contracts. The movement reflects changes as of the August 16 settlement date. Managed money now holds 308,899 long positions compared with 175,322 short positions. Open interest totaled 1,852,402. There were 56 hedge funds with large short positions last week, down by five compared with the prior week.

Can you say “short covering”? In the prior week, hedge funds’ short positions actually increased by about 4,400 contracts. Chatter about OPEC’s possible production freeze convinced a large number of shorts to cut their losses and leave town. Short positions fell by nearly 25% from 232,202 contracts in the prior reporting period. Whether the market or the fundamentals of supply and demand drove last week’s price increase is left as an exercise for the reader.

Among the producers themselves, short positions outnumber longs, 519,418 to 228,313. The number of short positions rose by 31,959 contracts last week, and longs rose by 1,617 contracts. Positions among swaps dealers show 233,267 short contracts versus 231,943 long positions. Swaps dealers dropped 11,148 contracts from their short positions last week and dropped 15,028 contracts from their long positions.

Among the states, Texas added eight rigs, Pennsylvania added two and three states — Louisiana, Oklahoma and West Virginia — added one rig each. North Dakota lost two rigs and New Mexico lost one.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count rose by seven to 196. The Eagle Ford Basin in south Texas had no change and maintains 36 rigs, while the Williston Basin (Bakken) in North Dakota and Montana now has 27 working rigs, down by two compared with the prior week.

Enterprise Products Partners L.P. (NYSE: EPD) lists a posted price of $44.97 per barrel for WTI and an August 20 price of $45.92 a barrel for Eagle Ford crude. The price for both varieties rose by $4.03 a barrel over the past week.

The pump price of gasoline rose by about 1.2% week over week. Saturday morning’s average price in the United States was $2.152 a gallon, up from $2.127 a week ago. The year-ago price was $2.650 a gallon.