Oil Rig Count Rises by 7, Hedge Funds Reverse Course, Add Short Positions

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In the week ended March 3, 2017, the number of rigs drilling for oil in the United States totaled 609, up by seven compared with the prior week and up 217 compared with a total of 392 a year ago. Including 146 other rigs drilling for natural gas and one rig listed as “miscellaneous,” there are a total of 756 working rigs in the country, up by two week over week and up by 267 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 April delivery traded up about 1.1% on Friday to settle at $53.20. Crude prices decreased by 79 cents a barrel (1.5%) week over week.

The U.S. Energy Information Administration (EIA) reported last Thursday that crude supplies had increased by 1.5 million barrels in the week ended February 24 and that gasoline supplies had fallen by 500,000 barrels.

Although crude prices have risen recently, the uptick could slow or even come to a grinding halt as demand growth slows. Analysts at Wood Mackenzie expect U.S. demand for gasoline will peak next year and that global demand for the fuel will peak in 2021. Gasoline demand is expected to rise to a peak of around 9.45 million barrels per day this year and remain largely unchanged in 2018 before slipping to 9.28 million barrels per day in 2019.

Global demand hikes will offset the U.S. declines, but overall, Wood Mac expects demand growth to be cut in half, from a historical average of around 1 million barrels a day to 500,000 barrels a day. The world’s largest oil trader, Vitol, sees peak demand delayed until 2027 or 2028, and Royal Dutch Shell says the peak will arrive in the 2030s.

Some OPEC countries have an additional problem: production costs. Nigeria’s oil minister said last week that OPEC producers need to lower their production costs if they intend to compete successfully with U.S. shale producers. Some of the cartel’s largest producers need a price of around $60 a barrel in order to generate enough cash to start new projects. Most U.S. shale producers already have cut costs enough that a price between $35 and $50 a barrel is sufficient to make a profit.

The natural gas rig count decreased by five to a total of 146. The count for natural gas rigs is now up by 49 year over year. Natural gas for April delivery closed the week at $2.83 per million BTUs, up three cents on the front-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 9,375 short futures and options contracts for WTI crude oil last week and dropped 17,555 long contracts. The movement reflects changes as of the February 28 settlement date. Managed money now holds 435,475 long positions compared with 48,768 short positions. Open interest totaled 2,765,071. There were 43 hedge funds with large short positions last week, up five from the prior week.

Among the producers themselves, short positions outnumber longs 701,712 to 410,517. The number of short positions fell by 873 contracts last week, and longs dropped 815 contracts. As prices rise toward what most analysts believe will be close their highest level of the year, the incentive diminishes for producers to purchase short contracts as a hedge against falling prices.

U.S. refineries ran at 86% of capacity, a week-over-week increase of about 393,000 barrels a day. Imports rose by about 303,000 barrels a day, to around 7.6 million barrels a day in the week.

Among the states, Texas added six rigs last week, North Dakota added three, Louisiana added two and Utah added one rig. Oklahoma lost three rigs, Pennsylvania and Wyoming lost two each, and three states — Alaska, Colorado, and New Mexico — each lost one rig.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 308, up two compared with the previous week’s count. The Eagle Ford Basin in south Texas has 69 rigs in operation, up by five week over week, and the Williston Basin (Bakken) in North Dakota and Montana now has 38 working rigs, up three for the week.

Enterprise Products Partners lists a February 25 posted price of $50.44 per barrel for WTI and $51.23 a barrel for Eagle Ford crude. The price for WTI and Eagle Ford crudes fell by 66 cents a barrel in the week.

The pump price of regular gasoline rose by three cents a gallon week over week. Saturday morning’s average price in the United States was $2.316 a gallon, compared with $2.286 a week ago. The year-ago price was $1.811 a gallon.