Crude Falls to New 7-month Low as U.S. Rig Count Climbs Yet Again

by Ship & Bunker News Team
Tuesday June 20, 2017

Trading on Monday assumed a depressingly familiar pattern, with losses amounting to a seven month closing low and accompanied by reports that the U.S. rig count has increased yet again, thus fueling the bearish sentiment pervading the market.

West Texas Intermediate settled down 54 cents to $44.20 per barrel, the weakest closing since November 14, while Brent dropped 40 cents to $46.97 per barrel; prices for both benchmarks are down about 13 percent since late May, when the Organization of the Petroleum Exporting Countries (OPEC) announced it would extend but not deepen its production cuts for nine more months in order to bring about a market re-balance.

In addition to reported output increases in Libya and Nigeria as well as on-going non-compliance of the OPEC agreement by Iraq, the bearish sentiment presumably is being stocked by Baker Hughes disclosing that the U.S. rig count increased again for the week ended June 16 - the 22nd consecutive week of increases.

The total U.S. rig count now stands at 933, higher than 927 recorded in the week ended June 9 as well as 424 a year ago; of these, the land rig count is 908.

Canada's rig count increased as well: it now stands at 159, compared with 132 last week and 69 a year ago.

Goldman Sachs said if the rig count holds, U.S. production will increase by 770,000 barrels per day between the fourth quarter of last year and the same quarter this year.

Unsurprisingly, Carsten Fritsch, analyst for Commerzbank, said, "There is no reason to be overly optimistic at the moment", and Tamas Varga, analyst for PVM, added, "Anyone who is looking for the bottom of the current price fall must keep his or her eyes on the supply-side equation and only get optimistic if the factors that have been driving oil prices lower since the end of May change."

John Kemp, market analyst for Reuters, pointed out that hedge funds and other money managers cut their combined net long position in the three major futures and options contracts linked to Brent and WTI by 51 million barrels in the week to June 13, and fund managers cut their net long position for the second week running by a cumulative total of 91 million barrels.

Kemp wrote, "Hedge funds have discounted the fact oil prices are already under than $50 per barrel and reassurances from OPEC ministers that global oil stocks will draw in the second half of the year; instead, they have focused on the continued rise in the number of rigs drilling for oil in the United States and signs gasoline and diesel demand may not be growing fast enough to absorb the record fuel being produced by U.S. refineries."

Kemp concluded that an eventual short-covering rally may occur, "but the rebound may not come until there are clear signs global stocks are falling and U.S. shale drilling is leveling off."

Last week, Warren Gilman, chairman and CEO of CEF Holdings, theorized that the low to mid $40s is the right place for crude to be, and he argued that given increased production from global players and relatively weak demand, "why in the world would we have an environment of rising oil prices?"