With production and inventories at record levels despite the total collapse in rig counts, all eyes remain on Baker Hughes data for any signal the algos can use to mount a run. The total rig count fell for the 12th week, down 43 to 1267. This 3.3% decline is the slowest drop in 6 weeks and oil prices are sliding on this news. The key level to watch for WTI is $48.24 which moves it into the red for the 8th month in a row.
• *U.S. TOTAL RIG COUNT -43 TO 1,267, BAKER HUGHES SAYS
• *U.S. OIL RIG COUNT -33 TO 986, BAKER HUGHES SAYS
The pace of decline (and this future possible production) is dropping...
In theory, Oil prices should surge on this news...
They are not...
Related: How Much Crude Oil Do You Consume On A Daily Basis?
The excess supply, continued record production, and record inventory in the US (compared to refinery demand in Europe) has smashed the Brent-WTI spread to over $12.50 - the highest since Jan 2014...
As Brean Capital's Peter Tchir recent noted, despite the plunge in rig counts, so far there is no sign of contraction in output.
The problem is that not all rigs are created equal, and what we see is still a “net” number. We see the net number of rigs that are working. The reality is that some new projects continue to come on line and are very high producing wells, and some of what is being taken away, was either old, or projects that hadn’t yet been contributing production. Related: OPEC Considers Emergency Meeting On Oil Prices
I for one, cannot claim to know what each and every rig in America can produce, let alone the world, but I am willing to bet there is at least one person out there with a spreadsheet that does. They can estimate production very well. These are the people who have been pounding on the table that this rig count is NOT helping production much, at least for the next 3 to 6 months. They are quickly learning the lesson of trying to get a few facts to stand in the way of a good meme, but I think they are about to get listened to. Especially as
• A Libyan pipeline is coming back on line
• Neither the Saudi rhetoric not willingness to pump, seems to have changed
• The “pump or die” needs of many leveraged companies is becoming more clear – some companies are in the unfortunate position of having to pump more at lower prices than at higher prices to meet cash flow needs
• Positioning once again got too bullish
So add to my list of worries for “risk on” trades, that while oil has stabilized, the next leg is likely lower.
* * *
Furthermore, the Front-month to 2nd month contango continues to surge - now at $2.30, a 4 year high...
"Rising U.S. inventories and the threat that expanding strike action might further reduce refinery runs prompting selling at the front of the WTI crude oil curve, with April futures falling to a $2.30 discount to the May contract, and the April Brent-WTI spread probing beyond the $12.50 mark," says Citi Futures energy futures specialist Tim Evans
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