U.S. Drilling Stalls Oil Prices

January 9, 2017 10:56 AM
Oil Pumps

Oil fell for the first time in four days as rising U.S. drilling activity fanned speculation that OPEC production cuts could boost North American output.

Futures dropped as much as 3 percent in New York. Gulf oil producers Saudi Arabia, the United Arab Emirates, Qatar, Oman and Kuwait are implementing the cuts they promised, Nawal Al-Fezaia, Kuwait’s OPEC governor, said in an interview Monday in Kuwait City. Still, that wasn’t enough to revive prices after Baker Hughes Inc. on Friday showed that U.S. drillers added rigs for the 10th-straight week to the highest level in a year.

Oil last year capped its biggest annual gain since 2009 as the Organization of Petroleum Exporting Countries and 11 other countries agreed to curb output starting Jan. 1 in an effort to trim a global stockpile glut. While producers from Iraq to Kuwait say they’ve started to curb supply, increases from exporters such as Libya, which is exempt from cuts, could put pressure on prices.

"There’s concern about the rising U.S. rig count and what that will mean for production in the next few months," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. "We’re getting confirmation of what was expected, the Arabian peninsula monarchies were expected to comply with the new targets. Iraq is the big question mark."

West Texas Intermediate for February delivery fell $1.58, or 2.9 percent, to $52.41 a barrel at 11:17 a.m. on the New York Mercantile Exchange. Total volume traded was about 12 percent below the 100-day average. The contract rose 0.4 percent to $53.99 a barrel on Friday to cap a fourth weekly gain.

Rig Count

Brent for March settlement dropped $1.67, or 2.9 percent, to $55.43 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a $2.14 premium to March WTI.

U.S. drillers boosted the rig count by four to 529 last week, according to data Friday from Baker Hughes. It’s the highest level since the week ended Jan. 1, 2016. Companies have added more than 100 rigs since the end of September.

See also: Oil bulls Hall, Andurand ride OPEC cut to double-digit gain

The output cuts already announced comprise between 60 and 70 percent of the total decrease pledged by OPEC and other producers, Kuwaiti Oil Minister Essam Al-Marzouk said to reporters at a joint news conference with OPEC Secretary General Mohammad Barkindo in Kuwait City.

Iraq’s oil exports from its southern ports in the Gulf reached a record high in December, Oil Minister Jabbar Al-Luaibi said in an e-mailed statement. The country’s production climbed in 2016 and it was initially reluctant to join the cuts, asking first for an exemption to help it fight Islamic State militants and then disputing OPEC’s baseline production data. Energy Aspects Ltd. doesn’t expect Iraq to comply with its output quota, the London-based 
consultant said last week in a note.

Possible Crack

"The rising flows from Iraq may be the first sign of a crack in OPEC compliance," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said in a telephone interview. "Compliance from the Gulf states is looking pretty good but there are a lot of questions about whether Iraq will follow."

A U.S. Navy destroyer fired three warning shots against four of Iran’s Islamic Revolutionary Guard Corps vessels on Sunday in the Strait of Hormuz, a U.S. Defense official said, asking not to be identified because the information isn’t public yet. About 20 percent of the world’s crude passes through the waterway that connects the Persian Gulf with the Arabian Sea.

"The market is overbought and under a lot of downward pressure," Yawger said. "The shots fired at the Iranian boats in the Strait of Hormuz didn’t do anything to the market. A few years ago that would have added a couple dollars to the price."

Oil-market news:

  • Russian oil output fell to 11.114 million barrels a day in the period from Jan. 1 to Jan. 8, from 11.247 million a day in October, data from the Energy Ministry’s CDU-TEK unit show.
  • Niger Delta Avengers will resume attacks on Nigerian oil facilities, a spokesman for the group said in a statement on a website.
  • Libya is working to re-open more oil fields, including El-Feel, National Oil Corp. Chairman Mustafa Sanalla said in a statement on the state-run company’s website.
  • The worldwide oil and gas rig count increased by 94 to 1,772 in December, the highest since January, according to Baker Hughes.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net, Grant Smith in London at gsmith52@bloomberg.net. To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Susan Warren, Carlos Caminada

©2017 Bloomberg L.P.

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