Tuesday, February 3, 2015

Commodities: Why The Oil Rig Count Hysteria Will Be Short-lived

(Drivebycuriosity) - Oil prices are rallying again. Since last Thursday the price for Brent Crude jumped from $48 to $57, and WTI (the American type) leaped from $44 to $52, a plus of around 20%.

It seems that the market is obsessed with the number of US oil-drilling rigs. Last week the number of US rigs dropped by 94 units to 1,223 rigs, a minus of around 7% (marketwatch). The drop in the rig count fanned speculation that the US oil production, which is a major cause for the current oil glut on the markets and the dropping oil prices, will shrink soon.

The funny thing is, until recently nobody cared about the number of oil rigs. The media didn`t report much about US oil rigs and the market ignored the rising numbers. Why does a falling rig count cause a sharp price reaction, when the rising rig count before last autumn was totally ignored from the market?  I think that the price jumps since last Thursday are just a hysterical reaction and are not backed by the fundamentals.

I suppose that prices around $43 for WTI caused some producers to idle the least-profitable rigs which lead to the falling rig count last week. But the majority of the oil rigs is still profitable and will continue to pump oil  (businessinsider  bloomberg). Therefore the number of idled oil rigs will go down significantly and the total count will stabilize soon, especially after the recent oil price jump.

The market also ignores the climbing oil supply from Iraq, Russia, Iran an other countries, which are still fueling the oil glut. Therefore the oil price will stay under pressure and resume its fall. The hysteria about the recent drop in the US oil rig count will be short lived.

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