Oil Rig Count Up by 13; Producers Dropping Hedges as Crude Price Rises

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In the week ended December 23, the number of rigs drilling for oil in the United States totaled 523, up by 13 compared with the prior week and down 15 compared with a total of 510 a year ago. Including 129 other rigs drilling for natural gas and one rig listed as “miscellaneous,” there are a total of 653 working rigs in the country, up by 16 week over week and down 47 year over year. The data come from the latest Baker Hughes North American Rotary Rig Count released on Friday.

West Texas Intermediate (WTI) crude oil for February delivery traded up about 2.2% on Friday to settle at $53.25. Crude prices increased by about 2.3% week over week. The U.S. Energy Information Administration (EIA) reported last Wednesday that crude supplies had increased by 2.3 million barrels in the week ended December 16, and that gasoline supplies had fallen by 1.3 million barrels.

Estimates of when the world’s crude oil market will rebalance have been all over the place. The International Energy Agency said earlier this month that the storage glut would end in the first half of 2017; OPEC forecast that rebalancing would not occur until the second half of next year. There have even been some forecasts that a rebalancing won’t occur until the first half of 2018.

Reuters oil analyst John Kemp reports that the second half of next year is when traders expect to see rebalancing in the market for Brent crude:

Brent futures prices remain in a contango through the first half of 2017, reflecting the need to cover the costs of storing and financing large volumes of crude.

But the contango starts to narrow significantly around June and disappears entirely by the end of the northern hemisphere summer.

The current structure of futures prices implies it will no longer be necessary or financially viable to store such large volumes of crude from the third quarter onwards.

Although the agreement between OPEC and non-OPEC producers runs only through June, physical market demands point toward a six-month extension of the deal.

All of this depends on no cheating on the agreement (not a given), a relatively modest increase from Libya and Nigeria, continuing growth in the global economy and a relatively muted reaction from U.S. shale producers to the higher prices. That’s an awful lot that has to go right.

The natural gas rig count increased by three to a total of 129. The count for natural gas rigs is down by 33 year over year. Natural gas for February delivery closed the week at $3.69 per million BTUs, up 31 cents on the near-month contract compared with the prior week.

Hedge funds — under the Managed Money heading in the Commodity Futures Trading Commission’s (CFTC’s) weekly Commitments of Traders report — dropped 5,699 short futures and options contracts for WTI crude oil last week and dumped 2,689 long contracts. The movement reflects changes as of the December 20 settlement date. Managed money now holds 356,769 long positions, compared with 50,613 short positions. Open interest totaled 2,720,965. There were 47 hedge funds with large short positions last week, up six from the prior week.

Among the producers themselves, short positions outnumber longs 622,395 to 365,127. The number of short positions fell by 47,763 contracts last week, and longs dropped 52,806 contracts. Positions among swaps dealers show 372,954 short contracts versus 116,328 long positions. Swaps dealers added 10,195 contracts to their short positions last week and added 2,790 contracts from their long positions.

Producers pulled back on their hedging programs last week, dumping nearly half a million barrels from their short positions. Other market participants, including refiners, dumped more than half a million long positions. This may signal that a floor of $50 a barrel has been set.

U.S. refineries ran at 91.5% of capacity, a week-over-week increase of about 184,000 barrels a day. Imports rose by more than 1.1 million barrels a day, to over 8.5 million barrels a day in the week.

Among the states, Oklahoma added six rigs last week, Texas added four, Alaska added three and seven other states added one rig each. West Virginia lost two rigs and Arkansas lost one last week.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 262, up four compared with the previous week’s count. The Eagle Ford Basin in south Texas has 44 rigs in operation, unchanged week over week, and the Williston Basin (Bakken) in North Dakota and Montana now has 32 working rigs, up one for the week.

Enterprise Products Partners lists a December 24 posted price of $49.47 per barrel for WTI and $50.92 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes rose by 1.12 cents a barrel in the week.

The pump price of regular gasoline rose nearly five cents a gallon over the week. Saturday morning’s average price in the United States was $2.280 a gallon, up $0.045 compared with $2.235 a week ago. The year-ago price was $2.006 a gallon.