Why Crude Prices Could Stay Low Regardless of Rig Counts

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In the week ended September 23, the number of rigs drilling for oil in the United States totaled 418, up by two compared with the prior week and down from a total of 641 a year ago. Including 92 other rigs drilling for natural gas and one rig listed as “miscellaneous,” there are a total of 511 working rigs in the country, up by five over the past week and down 327 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 November delivery traded down 3.7% on Friday to settle at $44.59, but up about 2% for the week. The U.S. Energy Information Administration (EIA) reported last Wednesday that crude supplies had decreased by 6.2 million barrels in the week ended September 16, and that gasoline supplies had had dropped by 3.2 million barrels.

Friday’s sharp drop in the price of crude is the result of comments that a production freeze from OPEC was unlikely to occur. The Saudis reportedly offered actually to cut production if the Iranians would agree to cap their production at the current level of 3.6 million barrels a day. Iran has not responded, but the country’s position all along is that it won’t discuss a freeze until it reaches pre-sanctions production levels of around 4.0 million to 4.2 million barrels a day.

Brent crude prices also face new pricing pressure. According to a report from Gibson shipbrokers, day rates on Suezmax-class tankers have jumped from $5,000 a day in mid-August to around $35,000 a day currently as Nigerian crude once again begins to flow.

In its weekly report, Gibson had this to say about the world’s oversupply of crude oil:

[T]here is a growing opinion between oil industry practitioners that oil markets are likely to remain oversupplied well into 2017. There are a number of reasons for that, including growing prospects for Nigerian, Caspian and Libyan crude production. The resilience of the US shale industry has prompted a number of leading oil consultancies to revise up their expectations for US crude oil production. The IEA has also voiced concerns of slowing demand growth in key markets, which together with anticipated increases in crude output, points to a sizable excess in supply over demand at least through the 1st half of 2017.

The number of rigs drilling for oil in the United States is down by 223 year over year and up two week over week. The natural gas rig count rose by three to a total of 92. The count for natural gas rigs is down by 105 year over year. Natural gas for November delivery closed the week at $3.03 per million BTUs, up a penny on the near-month contract compared with the prior week.

U.S. refineries ran at 92% of capacity, a week-over-week decrease of about 143,000 barrels a day. Imports rose by about 247,000 barrels a day, to about 8.3 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 — added 38,905 short contracts for WTI crude oil last week, and dropped 2,936 long contracts. The movement reflects changes as of the September 20 settlement date. Managed money now holds 290,493 long positions compared with 161,939 short positions. Open interest totaled 1,811,705. There were 52 hedge funds with large short positions last week.

After scaling back on short positions for a couple of weeks, hedge funds piled back into the short side last week. That followed a huge increase in long positions during the month of August. In other words, the hedgies have returned to a rough balance of their long-term positions.

Among the producers themselves, short positions outnumber longs, 507,277 to 253,632. The number of short positions fell by 10,517 contracts last week, and longs dropped 1,688 contracts. Positions among swaps dealers show 226,935 short contracts versus 194,749 long positions. Swaps dealers dropped 6,361 contracts from their short positions last week and added 7,934 contracts to their long positions.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 201. The Eagle Ford Basin in south Texas has 37 rigs in operation, while the Williston Basin (Bakken) in North Dakota and Montana now has 28 working rigs.

Enterprise Products Partners L.P. (NYSE: EPD) lists a posted price of $40.93 per barrel for WTI and a September 24 price of $42.38 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes rose by $1.45 a barrel in the week.

The pump price of gasoline rose by about 1% week over week. Saturday morning’s average price in the United States was $2.212 a gallon, up about two cents compared with $2.190 a week ago. The year-ago price was $2.289 a gallon.