Oil Climbs as Falling U.S. Rig Count Seen Further Curbing Output

OPEC Calls for Oil at $80 by 2020
  • U.S. rigs targeting oil fell by 8 last week: Baker Hughes
  • WTI-Brent crude spread was narrowest since January last week

Oil advanced on signs that producers are investing less in drilling, which could take a bigger bite out of falling U.S. crude production.

Explorers idled oil rigs for a third straight week in the U.S., Baker Hughes Inc. said Friday. U.S. crude output has fallen for six weeks as the price slump over the past year takes its toll on the shale-oil industry. About $1.5 trillion of potential investment in new oil projects isn’t viable with prices at $50 a barrel, according to consultant Wood Mackenzie Ltd.

"We’re seeing a delayed reaction to Friday’s rig count," Bob Yawger, director of the futures division at Mizuho Securities USA in New York, said by phone. "It’s all about production, production, production right now. The rig count will have an impact on production that’s already slid almost 500,000 barrels from it’s peak."

Oil is down about 50 percent from a year ago in New York amid a global oversupply that Goldman Sachs Group Inc. predicts may keep prices low for the next 15 years. WTI’s discount to Brent oil traded in London slipped to the narrowest since January last week, signaling that the global supply glut is expanding while it’s shrinking in the U.S.

North Sea

West Texas Intermediate for October delivery which expires Tuesday, rose $2, or 4.5 percent, to settle at $46.68 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 28 percent below the 100-day average. The more active November contract increased $1.94 to $46.96.

Brent for November settlement advanced $1.45, or 3 percent, to close at $48.92 a barrel on the London-based ICE Futures Europe exchange. The North Sea oil ended the session $1.96 higher than November WTI.

The European crude has weakened relative to WTI as shipments from Nigeria and Angola -- which are priced using Brent -- reach their highest since 2008, Miswin Mahesh and Michael Cohen, analysts at Barclays Plc., said in a report on Monday. North Sea exports are forecast to climb next month.

Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI traded in New York, dropped to 54.5 million barrels in the week ended Sept. 11, the lowest level since March, according to the Energy Information Administration.

"Inventories at Cushing have been falling and might have also dropped in the week ended Sept. 18," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. "There may be localized tightening, but the global market is nowhere near rebalancing."

Rebalancing Market

While $50 a barrel “is a reasonable short-term price" for rebalancing global supply and demand, it’s too low for the medium term, Paul Horsnell, head of commodities research at Standard Chartered Plc. said in a report.  It’s a price that’s low enough to stop non-OPEC supply growth and stimulate demand, he said.

Planned oil investments aren’t viable at $50 a barrel, highlighting the need to cut costs, according to Wood Mackenzie. The proposed projects, including spending on shale, are “now out of the money, or in starker terms, uneconomic at $50 oil,” James Webb, upstream research manager at Wood Mackenzie, said in a statement Monday.

Nibbling Investors

"There’s more news pointing to lower production, which is getting people to nibble in the market," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone.

The contraction in the WTI-Brent spread is unlikely to last as Canadian output recovers after technical problems, and Cushing supplies grow when nearby refiners begin seasonal maintenance, Adam Longson, an analyst at Morgan Stanley in New York, said in a report.

Hedge funds cut bets on falling WTI prices last week, leaving them the most bullish in two months, data from the Commodity Futures Trading Commission show. Money managers’ net-long position rose to 147,678 futures and options in the week ended Sept. 15.

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