Crude Falls as Rising Rig Count Seen Boosting U.S. Production

  • U.S. rig data show the longest stretch of gains since 2011
  • Oil market on the road to re-balancing: Saudi energy minister

How Quickly Can the U.S. Increase Oil Production?

Crude fell below $53 a barrel as the ramp-up of shale drilling spurred speculation that surging U.S. output will offset OPEC-led efforts to cut a global supply surplus.

Futures dropped 1 percent. U.S. explorers added 11 rigs last week to cap the longest stretch of gains since 2011, Baker Hughes Inc. data show. American crude output climbed to the highest level in more than a year in the week ended April 7, according to the Energy Information Administration. Output at major shale plays is seen rising next month to the highest since November 2015, the EIA said Monday.

The expansion in U.S. drilling is damping optimism that had lifted prices above $53 a barrel after some members of the Organization of Petroleum Exporting Countries expressed support for prolonging production cuts with other nations beyond June. While U.S. crude stockpiles fell from a record, OPEC said Wednesday in a report that rivals in the American shale patch are growing stronger.

"The rig count has climbed 32 of the last 36 weeks," Stephen Schork, president of Schork Group Inc., a consulting company in Villanova, Pennsylvania, said by telephone. "Production rose for an eighth week and the EIA has said we will be pumping 9.9 million barrels a day in 2018. U.S. producers are strong and are only going to get stronger."

West Texas Intermediate for May delivery fell 53 cents to settle at $52.65 a barrel on the New York Mercantile Exchange. Futures gained 1.8 percent last week to close at $53.18 a barrel. Total volume traded was about 39 percent below the 100-day average.

Brent for June settlement slipped 53 cents to $55.36 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $2.25 premium to June WTI. No futures were traded in New York or London on Friday due to the Good Friday holiday.

Contango Grows

Contango, the market structure where contracts for expiration months ahead trade at a premium to near-term futures, has been growing. The spread between the current Brent contract and the one for delivery a month later has widened to 52 cents, from 29 cents on April 3. The opposite, a situation known as backwardation, would indicate a more balanced market, which is what OPEC is pursuing.

"The steeper contango is a negative signal," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "The OPEC cuts should be supportive, especially for Brent. Instead of moving into backwardatation, the contango is growing."

See also: Bullish oil bets gain on signs OPEC cuts to outpace U.S. boom

Saudi Arabia’s Energy Minister Khalid Al-Falih said Monday that OPEC members and their allies are showing “very good” compliance with the promised output cuts they began making in January. The oil market is on the road to re-balancing, Al-Falih told reporters at a conference in Riyadh.

Increased Drilling

The U.S. oil rig count climbed to 683 last week, the highest since April 2015 and a 13th week of gains, Baker Hughes data showed on Friday. The number of working rigs has more than doubled from a 2016 low of 316 in May.

China’s economy accelerated for a second-straight quarter, according to data from the National Bureau of Statistics. Gross domestic product for the world’s second-biggest oil consumer increased by 6.9 percent in the first three months.

"The market’s lack of reaction to the Chinese data is telling," Yawger said. "A few years ago, the market would have been on fire after this data."

Oil-market news:

  • U.S. crude oil, gasoline and distillate fuel supplies probably fell last week, according to analysts surveyed by Bloomberg before an Energy Information Administration report on Wednesday.
  • Hedge funds boosted bets on higher WTI crude prices a second week as futures topped $53 a barrel for the first time in a month, U.S. Commodity Futures Trading Commission data show.
  • Hedge funds boosted net longs on Brent crude by the most since December, according to ICE Futures Europe data.
  • Nigeria will revive oil production this summer as it completes maintenance and repairs, and expects fellow OPEC members to continue to cut their output in the second half of the year, Oil Minister Emmanuel Kachikwu said.

— With assistance by Mahmoud Habboush

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