Energy prices are falling again to start the week as another week of increases in US oil drilling activity seem to be outweighing confirmation of Saudi production cuts so far. Currently WTI is about 85 cents above its low set last week, and if that support breaks, there’s likely another $2-3 to fall. Refined products are in a similar position, 2-3 cents/gallon above where they bottomed out last week and threatening another dime drop if those levels do not hold.
14 more oil rigs were put to work last week according to Baker Hughes’ weekly report, to 631 total. Whether or not prices continue their downtrend may determine if the rig count continues to grow this year, or if we might see the activity stall out in the mid-600 rig range this summer like we did in 2015. Given the lead time to start or stop a project, it will likely take several more weeks to see how drillers will react to the first drop back into the $40s this year.
Saudi Arabia’s crude oil production and export activity dropped in January, as expected based on the OPEC agreement. Perhaps most notable however is that a 700,000 barrel/day reduction in production, only corresponded to a 300,000 barrel/day reduction in export activity – several reports have noted the Kingdom’s drop in oil consumption as it updates its electrical grid to alternate power sources – which means the production cut agreement may have less impact on international markets than expected.
As expected, the net long position held by money managers in WTI and Brent was slashed last week after the 2017 trading range finally broke to the downside. Perhaps what was not as expected was the declines were as much driven by new short positions (betting on lower prices) as they were by liquidation of long positions (betting on higher prices). Bulls may say that the new shorts could spark the next rally if they get squeezed out of those positions, while bears will find solace that there is still so much long money left to be liquidated if lower prices persist.