Crude production cuts hit market

February 16, 2015 09:35 AM

Oil traded at an almost two-month high in London amid speculation that a slowdown in U.S. drilling may curb production.

Brent crude futures added 1.1% in London, extending a third weekly gain. U.S. drillers cut the number of rigs in service by 84 to 1,056, the lowest since August 2011, data from Baker Hughes Inc. show. Still, the decline isn’t steep enough to sufficiently curb production and address the current excess, according to Goldman Sachs Group Inc.

The U.S. is pumping oil at the fastest pace in three decades as a combination of horizontal drilling and hydraulic fracturing unlocks supplies from shale formations including the Permian and Eagle Ford in Texas and the Bakken in North Dakota. Oil prices are recovering faster and the supply surplus is smaller than previously expected, Kuwait Oil Minister Ali Al- Omair said.

“The reduction in drilling rigs was relatively strong,” Olivier Jakob, managing director at Petromatrix GmbH, said by e- mail from Zug, Switzerland. “We know that the drop in production is going to come later this year.”

Brent for April settlement rose as much as $1.05 to $62.57 a barrel on the London-based ICE Futures Europe exchange, the highest since Dec. 22, and traded for $62.21 as of 1:29 p.m. local time. It climbed 6.4% last week. The European benchmark crude traded at a premium of as much as $8.50 to WTI for the same month, the widest since August.

Bullish Bets

West Texas Intermediate for March delivery rose as much as 91¢, or 1.7%, to $53.69 a barrel in electronic trading on the New York Mercantile Exchange. The contract increased $1.57 to $52.78 on Feb. 13. Floor trading on Monday will be suspended for a public holiday and transactions will be booked the following day for settlement purposes. The volume of all futures traded was 14% below the 100-day average for the time of day.

Hedge funds and other money managers’ net wagers on rising Brent prices rose 13% to 158,974 contracts in the week ended Feb. 10, the highest since the early days of last year’s oil slump on July 8, according to ICE data. The change was driven by a reduction in bearish positions, rather than fresh bullish bets, signaling traders remain cautious that the price recovery will endure, according to Saxo Bank A/S.

Speculators reduced bullish WTI bets by 2% to 203,696 contracts in a fourth weekly cut, missing the market rebound, U.S. Commodity Futures Trading Commission data show.

Drillers in the U.S., the world’s largest oil consumer, have idled 519 rigs in the past 10 weeks, a 33% reduction, according to Baker Hughes, a Houston-based oil-field services company.

Rig Count

“The rig count decline is still not sufficient, in our view, to achieve the slowdown in U.S. production growth required to balance the oil market,” Damien Courvalin, a New York-based analyst at Goldman Sachs, said in a report. “Oil prices need to remain lower in the coming quarters.”

The nation pumped 9.23 million barrels a day through Feb. 6, the fastest pace in weekly Energy Information Administration records dating back to January 1983.

Libya’s National Oil Corp. said it would stop pumping crude at all fields if the authorities fail to contain attacks on facilities that have reduced output to the lowest in a year.

A fire at a pipeline carrying crude to the eastern port of Hariga has been extinguished and National Oil plans to re-open it in a week, according to Mohamed Elharari, a spokesman in Tripoli. Production has been cut by 180,000 barrels a day after the bombing of a pipeline that carries crude to Hariga, he said earlier.

Libya Output

Libya’s daily output, which averaged 1.6 million barrels before the 2011 rebellion that ended Muammar Qaddafi’s 42-year rule, was estimated at 300,000 barrels in January, a Bloomberg survey of oil companies, producers and analysts showed.

Brent gained about 38% since Jan. 13 when it fell to $45.19 a barrel. Oil prices will continue to recover in the second half of this year and the global crude surplus is less than the 1.8 million barrels a day the country previously estimated, according to Kuwait’s Al-Omair.

“We were expecting oil prices to recover in the second half, but they recovered faster than what we expected,” Al- Omair said at an industry conference in Kuwait City. “I expect oil prices to keep improving.”

About the Author