Oil Falls on Rising U.S. Rig Count

Total rig count rose to 414 for the week ended September 9th, 2016

Crude oil prices fell above 1.5% on Monday, September 12th, 2016, after data from Baker Hughes on Friday, September 9th, 2016, showed that U.S. oil drillers added rigs for a 10th straight week in the past 11 weeks, the longest streak without rig cuts since 2011. As a result, oil traders became less confident of higher oil prices, and cut their net long U.S. crude futures and options positions for a second consecutive week, according to the U.S. Commodity Futures Trading Commission and as reported by Reuters.o1

After falling to 206 rigs in H1 FY16 from a high in October 2014, the U.S. rig count has increased or held steady every week so far in Q3 FY16. Drillers added 7 oil rigs in the week to September 9th, 2016, bringing the total rig count up to 414, the most since February 2016. The latest rig count is well below the 652 oil rigs that were active during the same week a year ago, but increased from a low of 316 rigs reported in May 2016.

All of the rigs added this week were those units located offshore in Louisiana that returned to service after shutting last week due to Tropical Storm Hermine. o2Drillers removed 7 offshore rigs during the week ended September 2nd, 2016, and added 8 back during the week ended September 9th, 2016.

More than two-thirds of rigs added over the past two months were located in the Permian basin in west Texas and eastern New Mexico. Those new rigs would help boost Permian production by about 3,000 barrels per day in September 2016 and about 18,000 bpd in October 2016, which should bring production in the basin to about 2 million bpd.

Fading hopes for a production freeze

U.S. crude futures were on course to rise about 4% this week on hopes for a global deal on stabilizing crude output after Saudi Arabia, the leading oil producer inside OPEC, and Russia, the biggest producer outside the group, agreed on Monday to cooperate in oversupplied markets. On Friday, September 9th, 2016, U.S. crude was trading at above $46 a barrel. Futures for calendar 2017 were trading over $50. Oil’s almost 5% price decline since September 8th, 2016, partly reverses a 10% rally early in September 2016, which was fueled by speculation that oil exporters could cap production.

In August 2016, some members of the Organization of the Petroleum Exporting Countries (OPEC) had called for freezing output aimed at market rebalancing, where supply has consistently outpaced demand. An informal meeting of OPEC member countries is scheduled to take place on the sidelines of the International Energy Forum in Algeria from September 26-28th, 2016. OPEC members including Venezuela, Ecuador, and Kuwait have called for an output freeze; however, the talks are expected to fail since other key OPEC members including Saudi Arabia, Iraq, and Iran have been ramping up oil exports and battling for higher market share through discounted selling prices. Finally, the OPEC and non-OPEC members have reached a consensus about the need to stabilize the oil market to support crude oil prices in the near term.

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