Rising Rig Count Stifles Crude Oil Price Gains as Hedge Fund Short-Covering Ends

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In the week ended October 14, the number of rigs drilling for oil in the United States totaled 432, up by four compared with the prior week and compared with a total of 595 a year ago. Including 105 other rigs drilling for natural gas and two rigs listed as “miscellaneous,” there are a total of 539 working rigs in the country, up by 15 from a week ago and down 248 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 0.2% on Friday to settle at $50.32. The U.S. Energy Information Administration (EIA) reported last Thursday that crude supplies had increased by 4.9 million barrels in the week ended October 7, and that gasoline supplies had fallen by 1.2 million barrels.

While it’s too early to make a definitive statement about where crude oil prices will end the year, it is interesting to note that $50 a barrel is about the most the market will accept. WTI closed above $50, at $50.44 a barrel, on Thursday, October 5, for the first time in four months and hasn’t moved very far since.

The October revision to the EIA’s Short-Term Energy Outlook indicates production falling in 2016 and rising again in 2017. U.S. fourth-quarter production is forecast to fall by 120,000 barrels a day and average 8.7 million barrels a day for 2016, rising to 8.8 million barrels a day in 2017.

Recent reports from the International Energy Agency (IEA) and OPEC also indicate that production will rise slightly next year, although demand is expected to rise as well. The EIA expects the global oil market to reach balance in the third quarter of next year, primarily as a result of consumption finally outpacing production.

Regarding price, the EIA forecasts an average 2016 price for Brent crude of $43 a barrel, rising to $51 in 2017. WTI is expected to cost about $1 a barrel less in both years. The agency also noted, again, the high uncertainty and volatility of crude oil prices.

The number of rigs drilling for oil in the United States is down by 163 year over year and up four week over week. The natural gas rig count jumped by 11 to a total of 105. The count for natural gas rigs is down by 87 year over year. Natural gas for November delivery closed the week at $3.28 per million BTUs, up 11 cents on the near-month contract compared with the prior week.

U.S. refineries ran at 85.5% of capacity, a week-over-week decrease of about 480,000 barrels a day. Imports rose by about 151,000 barrels a day, to around 7.9 million barrels a day in the week.

Hedge funds — under the Managed Money heading in the Commodity Futures Trading Commission’s (CFTC’s) weekly Commitments of Traders report — dropped 20,907 short contracts for WTI crude oil last week and added 10,637 long contracts. The movement reflects changes as of the October 11 settlement date. Managed money now holds 337,612 long positions, compared with 83,237 short positions. Open interest totaled 1,880,412. There were 36 hedge funds with large short positions last week, down from 42 in the prior week.

Among the producers themselves, short positions outnumber longs, 540,757 to 242,076. The number of short positions rose by 12,564 contracts last week, and longs dropped 8,628 contracts. Positions among swaps dealers show 280,611 short contracts versus 169,961 long positions. Swaps dealers added 31,955 contracts to their short positions last week and 37 contracts to their long positions.

Over the past two weeks, speculators have dumped about 70,000 short contracts in a classic short squeeze. Now that shorts are out and longs are in, further price increases related to short-covering are far less likely — and so are rising prices for crude. Remember, the physical market is still over-supplied and won’t be in balance for about another year.

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

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 201, down two compared with the previous week’s count. The Eagle Ford Basin in south Texas has 31 rigs in operation, down four 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 15 posted price of $46.80 per barrel for WTI and $48.25 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes rose by $0.54 a barrel in the week.

The pump price of gasoline slipped by about 0.5% week over week. Saturday morning’s average price in the United States was $2.248 a gallon, down just over a penny compared with $2.259 a week ago. The year-ago price was $2.293 a gallon.