OPEC Cuts Best News in 2 Years for US Shale Producers

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In the week ended September 30, the number of rigs drilling for oil in the United States totaled 425, up by seven compared with the prior week, but down from a total of 614 a year ago. Including 96 other rigs drilling for natural gas and one rig listed as “miscellaneous,” there are a total of 522 working rigs in the country, up by 11 in the past week week and down 287 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 up 0.46% on Friday to settle at $48.05, posting a gain of 7.9% for the month of September, but down 0.2% for the third quarter. The U.S. Energy Information Administration (EIA) reported last Wednesday that crude supplies had decreased by 1.9 million barrels in the week ended September 23, and that gasoline supplies had risen by 2 million barrels.

The big news last week came from Algiers, where OPEC ministers agreed to cut production from more than 33 million barrels a day to around 32.5 million barrels. Depending on the number used to calculate current OPEC production, that works out to a cut of 250,000 to 750,000 barrels a day.

If this is beginning to look like a case of deja vu all over again, there’s a reason. The ministers did not specify where the cuts would come from, leaving that discussion for the cartel’s next meeting at the end of November. And in the unlikely event that the ministers agree on production levels by country, chances of that agreement being honored are highly unlikely. OPEC’s track record at sticking to production quotas is nonexistent.

And this time is likely to be different in an unexpected way. Where Saudi Arabia has been the swing producer, able to pump more or less crude as the price situation demanded, this time the swing producers are U.S. shale oil companies. In fact, the production cut is probably the best news U.S. shale producers have had in more than two years.

The OPEC announcement drove crude prices up near $50 a barrel, a price at which many U.S. shale producers can break even and some can make a (small) profit. But the message is clear to U.S. producers: “Drill, baby, drill.

The number of rigs drilling for oil in the United States is down by 189 year over year and up seven week over week. The natural gas rig count rose by four to a total of 96. The count for natural gas rigs is down by 99 year over year. Natural gas for November delivery closed the week at $2.90 per million BTUs, down 13 cents on the near-month contract compared with the prior week.

U.S. refineries ran at 90.1% of capacity, a week-over-week decrease of about 253,000 barrels a day. Imports tumbled by about 474,000 barrels a day, to around 7.8 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 — dropped 8,953 short contracts for WTI crude oil last week, and added 17,432 long contracts. The movement reflects changes as of the September 27 settlement date. Managed money now holds 307,925 long positions, compared with 152,986 short positions. Open interest totaled 1,830,991. There were 58 hedge funds with large short positions last week.

Among the producers themselves, short positions outnumber longs, 518,771 to 254,805. The number of short positions rose by 11,494 contracts last week, and longs added 1,173 contracts. Positions among swaps dealers show 227,944 short contracts versus 195,043 long positions. Swaps dealers added 1,009 contracts to their short positions last week and added 294 contracts to their long positions.

Among the states, New Mexico added three rigs last week, North Dakota added two and seven states each added one rig: Alaska, Arkansas, Colorado, Louisiana, Oklahoma, Pennsylvania and West Virginia. The only state to lose a rig this week was Texas, where the count fell by one.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 204, up three compared with the previous week’s count. The Eagle Ford Basin in south Texas has 36 rigs in operation, down one week over week, and the Williston Basin (Bakken) in North Dakota and Montana now has 30 working rigs, a gain of two for the week.

Enterprise Products Partners L.P. (NYSE: EPD) lists an October 1 posted price of $44.63 per barrel for WTI and $46.08 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes rose by $3.70 a barrel in the week.

The pump price of gasoline rose by about 0.5% week over week. Saturday morning’s average price in the United States was $2.222 a gallon, up about a penny compared with $2.211 a week ago. The year-ago price was $2.289 a gallon.