In the week ended December 30, the number of rigs drilling for oil in the United States totaled 525, up by two compared with the prior week and down 11 compared with a total of 536 a year ago. Including 132 other rigs drilling for natural gas and one rig listed as “miscellaneous,” there are a total of 658 working rigs in the country, up by five week over week and down 40 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 0.2% on Friday to settle at $53.89. Crude prices increased by about 1.2% week over week. The U.S. Energy Information Administration (EIA) reported last Thursday that crude supplies had increased by 600,000 barrels in the week ended December 23 and that gasoline supplies had fallen by 1.6 million barrels.

The average difference (spread) between the price of a barrel of Brent crude and WTI crude in 2016 was just over $1.00 a barrel. Many analysts see that spread widening to an average of $1.25 a barrel in 2017 and $2.50 in 2018 (Barclays) or to $1.75 in 2017 and $3.00 in 2018 (Goldman Sachs).

Industry analysts at S&P Global Platts say a key factor in pricing WTI at a discount to Brent in 2017 is U.S. production. At $50 a barrel for WTI, Platts notes, “[C]urrent prices are more than enough to keep producers happy.”

How happy? Platts continues:

S&P Global Platts … data shows Permian basin shale offers internal rates of return of between 18-21% at current prices, with those for North Dakota’s Bakken not far behind, near 16%.

Platts cites independent energy economist Philip Verleger who said:

Improving technology is offsetting traditional factors by a ratio of 10 to 1. This means that wells not drilled in 2016 can be drilled in 2017 for 70 or 80% of the costs that might have been incurred in in 2016.

What does all this add up to? If the WTI-Brent spread widens enough, U.S. producers will begin exporting more crude.

But this is where a potential change in U.S. tax policy could gum up the works. The incoming Trump administration has proposed a 20% tax on crude imports while leaving exports untaxed. Verleger estimates that the “border adjustment” taxes would drive the spread between WTI and Brent as high as 25%. A barrel of WTI that costs $53.89 today would cost more than $67 under such a tax scheme. U.S. retail prices would jump and exports of U.S. crude (and even some finished products) would vanish.

The natural gas rig count increased by three to a total of 132. The count for natural gas rigs is down by 30 year over year. Natural gas for February delivery closed the week at $3.74 per million BTUs, up five 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 — added 51 short futures and options contracts for WTI crude oil last week and added 1,803 long contracts. The movement reflects changes as of the December 27 settlement date. Managed money now holds 358,573 long positions, compared with 50,664 short positions. Open interest totaled 2,760,088. There were 45 hedge funds with large short positions last week, down two from the prior week.

Among the producers themselves, short positions outnumber longs 614,449 to 363,362. The number of short positions fell by 7,946 contracts last week, and longs dropped 1,765 contracts. Positions among swaps dealers show 378,993 short contracts versus 113,715 long positions. Swaps dealers added 1,000 contracts to their short positions last week and dropped 2,613 contracts from their long positions.

U.S. refineries ran at 91% of capacity, a week-over-week decrease of about 101,000 barrels a day. Imports fell by about 300,000 barrels a day, to about 8.2 million barrels a day in the week.

Among the states, Texas added three rigs last week, Oklahoma added two and New Mexico and North Dakota added one new rig each. Kansas lost one rig last week.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 264, up two compared with the previous week’s count. The Eagle Ford Basin in south Texas has 46 rigs in operation, also up two rigs week over week, and the Williston Basin (Bakken) in North Dakota and Montana now has 33 working rigs, up one for the week.

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Enterprise Products Partners lists a December 31 posted price of $50.17 per barrel for WTI and $51.62 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes rose by $0.70 a barrel in the week.

The pump price of regular gasoline rose five cents a gallon week over week. Saturday morning’s average price in the United States was $2.330 a gallon, compared with $2.280 a week ago. The year-ago price was $2.000 a gallon.

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