Rising Rig Count Sends Crude Price Back Below $50 a Barrel

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In the week ended October 7, the number of rigs drilling for oil in the United States totaled 428, up by three compared with the prior week and compared with a total of 605 a year ago. Including 94 other rigs drilling for natural gas and two rigs listed as “miscellaneous,” there are a total of 524 working rigs in the country, up by two in the past week and down 271 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 1.8% on Friday to settle at $49.55, after settling at $50.44 on Thursday, the first close above $50 in more than three months. The U.S. Energy Information Administration (EIA) reported last Wednesday that crude supplies had decreased by 3 million barrels in the week ended September 30, and that gasoline supplies had had risen by 200,000 barrels.

The key question regarding the crude oil price rise is how long it will last. Breaking through $50 a barrel is one thing; staying above that level for, say, three months is another. The crude futures market is just one data point.

Another thing to try to keep track of is what is actually happening in the physical market for oil. Right now, there seems to be little to support a sustained increase in crude prices.

Earlier this week we noted a couple of factors that do not favor a higher crude price for any length of time. First, China has apparently slowed or stopped purchasing crude for its strategic reserve. Worse, if the price of crude rises much, the Chinese may decide to re-export some of the oil they bought cheaply over the past couple of years.

Second, Bloomberg reported last week that there are 10 tankers loaded with North Sea crude that have not found buyers. The futures market has returned to contango, meaning that current spot prices for crude are lower than futures prices. A forward curve in contango indicates an oversupplied market where prompt cargoes sell at lower prices than those for later delivery.

The number of rigs drilling for oil in the United States is down by 177 year over year and up three from last week. The natural gas rig count fell by two to a total of 94. The count for natural gas rigs is down by 95 from a year ago. Natural gas for November delivery closed the week at $3.17 per million BTUs, up 27 cents on the near-month contract compared with the prior week.

U.S. refineries ran at 88.3% of capacity, a week-over-week decrease of about 302,000 barrels a day. Imports fell by about 125,000 barrels a day, to around 7.7 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 48,842 short contracts for WTI crude oil last week, and added 19,050 long contracts. The movement reflects changes as of the October 4 settlement date. Managed money now holds 326,975 long positions, compared with 104,144 short positions. Open interest totaled 1,871,665. There were 42 hedge funds with large short positions last week, down from 58 in the prior week.

Among the producers themselves, short positions outnumber longs, 528,193 to 250,704. The number of short positions rose by 9,422 contracts last week, and longs dropped 4,101 contracts. Positions among swaps dealers show 248,656 short contracts versus 169,924 long positions. Swaps dealers added 20,712 contracts to their short positions last week and dumped 25,119 contracts to their long positions.

Among the states, Oklahoma and Texas each added two rigs last week while Alaska, Louisiana and Pennsylvania each added one. Colorado, New Mexico, Utah and West Virginia each lost a rig last week.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 203, down one compared with the previous week’s count. The Eagle Ford Basin in south Texas has 35 rigs in operation, down by one, week over week, and the Williston Basin (Bakken) in North Dakota and Montana now has 30 working rigs, unchanged for the week.

Enterprise Products Partners L.P. (NYSE: EPD) lists an October 8 posted price of $46.26 per barrel for WTI and $47.71 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes rose by $1.63 a barrel in the week.

The pump price of gasoline rose by about 1.6% week over week. Saturday morning’s average price in the United States was $2.259 a gallon, up nearly four cents compared with $2.222 a week ago. The year-ago price was $2.314 a gallon.