US drilling rigs drop along with investor confidence

Oil explorers reduced rigs drilling in US oilfields this week, fuelling optimism that a shale slowdown and Opec production cuts will be enough to deflate a glut and strengthen crude prices.

Working rigs targeting crude fell by 1, bringing the total to 765, according to Baker Hughes data reported Friday. Producers ended 23 straight weeks of additions with a pullback at the end of June, breaking the longest stretch of continuous growth in three decades. Even so, more than twice as many rigs are drilling for oil now than in May 2016, when the count hit a low point of 316.

"It echoes what we’ve been expecting and what explorers and producers have been saying," Andrew Cosgrove, senior analyst for energy and mining equity at Bloomberg Intelligence, said by telephone. "They’re dialing back some of their expectations for output in the second half of the year."

The Eagle Ford basin in Texas bucked the trend by adding three rigs for a total of 70 working there. The Permian basin was unchanged, putting an end to three weeks of expansion.

Shares Stumble

Shares of major shale producers including Pioneer Natural Resources and EOG Resources tumbled this week as investors began to lose confidence in the prolific Permian basin. As the productivity of older wells in shale fields is rapidly declining, explorers added rigs at a record pace this year to keep increasing output. The Permian has seen the steepest declines among the four largest US shale plays.

West Texas Intermediate, the US benchmark, retreated this week following the strongest rally of the year that pushed prices briefly to US$50 a barrel. Investors focused on the glut despite a seasonal increase in American fuel demand, which is due to end in September.

While Opec members including Saudi Arabia and Kuwait have pledged to deepen supply cuts to shore up oil prices, their efforts are being hampered by a surge in production from fellow oil exporters Libya and Nigeria. Rising production in Libya helped drive an increase in output from Opec, which reached the highest level this year.

Steady growth in US output is adding to that pain, with US crude production expanding by 20,000 barrels a day this week according to data from the Energy Information Administration.

"The market still needs about another year and a half for demand to catch up," Mr Cosgrove said.

*Bloomberg