The number of rigs drilling for oil in the United States rose again this week, extending its second-best streak of no cuts into a 17th straight week, with analysts expecting more additions as crude prices hold over $50 a barrel.
Drillers added 11 oil rigs in the week to Oct. 21, bringing the total count up to 443, the most since February, but still below the 594 rigs seen a year ago, according to energy services firm Baker Hughes Inc on Friday.
That 17-week streak of not cutting rigs matched a stretch in 2010, making it the second-longest run since 1987, following 19 weeks in 2011.
The Baker Hughes oil rig count plunged from a record of 1,609 in October 2014 to a six-year low of 316 in May after crude prices collapsed from over $107 a barrel in June 2014 to near $26 in February 2016 due to a global oil glut.
But after U.S. crude briefly climbed over $50 a barrel in May and June, drillers have added 127 oil rigs. Analysts said prices over $50 were high enough to prompt energy firms to return to the well pad.
U.S. crude futures continued to trade over $50 a barrel for much of this week, spurred by continued talk of an OPEC production cut and a surprisingly large drop in U.S. inventories for the sixth week out of seven.
That put the front-month on track to rise for a fifth week in a row, its longest winning streak since March, gaining about 18 percent during that time.
With oil prices expected to continue rising in 2017 and 2018 amid a forecast tightening of the supply-demand balance, analysts said energy firms will boost spending on drilling.
Futures were trading above $53 a barrel for calendar 2017 and around $55 for calendar 2018.
Analysts at Simmons & Co, energy specialists at U.S. investment bank Piper Jaffray, this week forecast total oil and natural gas rigs would average 500 in 2016, 666 in 2017 and 876 in 2018.
That compares with an average of 978 oil and gas rigs active in 2015 and 484 so far this year, according to Baker Hughes data.
Source: Reuters (Reporting by Scott DiSavino; Editing by Meredith Mazzilli)
OPEC’s agreement on an new production target has been followed by a bout of renewed optimism about the rebalancing of the oil market.
But there are so far few signs of imminent rebalancing in the structure of Brent futures prices for 2017.
“Fundamentals are improving and the market is rebalancing,” Saudi Arabia’s energy minister told a conference in London on Oct. 19.
“The recent OPEC accord in Algiers was designed to further reinforce the already improving fundamentals,” he explained (“Healthier oil market conditions at hand”, Energy Intelligence, Oct. 20).
There are signs that stocks of crude and products have stabilized and even started to fall after rising since 2014 (“Asia oil markets are tightening as China cuts output, fuel stocks dwindle”, Reuters, Oct. 21).
Like the Saudi energy minister, some oil market analysts have become more optimistic the long-awaited turning point in the cycle has at last arrived.
Brent prices for December delivery have climbed $9 per barrel from the recent low in early August reflecting that optimism as well as short covering by hedge funds.
But the forecast rebalancing is not evident in the structure of the forward curve, which is where any tightening in the supply-demand balance should show up.
The timespreads in WTI have risen significantly in recent weeks, mirroring the drawdown in U.S. crude stockpiles.
But timespreads in Brent, more representative of global oil market conditions, have remained weak despite the Algiers agreement.
For many physical traders, timespreads rather than spot prices provide the most reliable guide to the supply-demand-stocks balance (“Brent contango is hard to square with missing barrels”, Reuters, March 9).
In the past, a strengthening of crude timespreads has usually coincided with a shift in the supply-demand balance from surplus to deficit.
However, Brent spreads have weakened rather than strengthened in recent weeks and remain far below the highs reported in the second quarter of 2016.
The market is no longer as severely oversupplied as it was in the second half of 2014 and throughout 2015 but there are no signs of it moving into deficit yet which will be needed to draw down stockpiles.
Continued weakness in the spreads suggests many market participants see the road to rebalancing as a long one with a sustained drawdown in crude inventories still some way into the future.
The U.S. Energy Information Administration has predicted that global oil stocks will continue rising through the first half of 2017 and only begin falling in the second half (“Short-Term Energy Outlook”, EIA, October 2016).
The International Energy Agency has reached a similar conclusion: “Our supply-demand outlook suggests that the market – if left to its own devices – may remain in oversupply through the first half of next year.”
The IEA concedes “if OPEC sticks to its new target, the market’s rebalancing could come faster” but that remains subject to considerable uncertainty (“Oil Market Report”, IEA, October 2016).
The continued weakness in the Brent spreads suggests that view is shared by the majority of crude market participants.