Oil Higher on Falling US Production

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended higher this afternoon on technical support and expectations oil production will continue to decline and bring the market into balance with demand.

Those expectations followed a report from Baker Hughes showing domestic oil drilling eased for the third week last week while consultant Wood Mackenzie estimated $1.5 trillion in planned oil production projects are likely to be scrapped because the low oil price environment is hurting the balance sheets of a number of oil companies.

"Traders are starting to worry about a drop in U.S. oil production," said Phil Flynn, a senior analyst at Price Futures Group.

"[Oil] markets have managed a modest bounce in what looks like a technical correction without breaking fundamental news," said analyst Tim Evans at Citi Futures.

NYMEX October WTI crude futures settled $2.00 to $46.68 per barrel (bbl) while ICE November Brent advanced $1.45 to a $48.92 bbl settlement after inside trade. NYMEX October ULSD futures climbed 2.33 cents to a $1.5140 gallon settlement while NYMEX October RBOB futures rallied 4.69 cents to a $1.4031 gallon settlement, off a better than one-week high of $1.4099.

On Wall Street, U.S. equities rallied this afternoon after hawkish comments from U.S. Federal Reserve officials.

Atlanta Fed President Dennis Lockhart and St. Louis Fed President James Bullard both said the Fed will likely raise interest rates this year because the risk of global uncertainty was modest.

The dollar came off its highs on Lockhart's remarks that were interpreted as more dovish than those from the dollar-friendly remarks made by Bullard this morning.

Earlier, the greenback had initially strengthened against the euro after a European Central Bank economist suggested over the weekend that the door was open for more ECB stimulus.

In its weekly drilling report, Baker Hughes said the total U.S. rig count decreased by six to 842 during the week-ended Friday (9/18), with oil rigs in operation down 1,089 from a year ago. There were 644 rigs drilling for oil this week, down eight on the week and 957 lower than the corresponding week a year ago.

The U.S. rig count has become a closely watched data-point in the past two years because it is considered as a measure of future oil production. The number of operating rigs is expected to determine U.S. supply to global oil balance. Drilling rigs have fallen in the past three weeks.

Wall Street bank Goldman Sachs said in a report the rig count data pointed to a decline in the nation's oil production of 250,000 barrels per day (bpd) between the second and fourth quarters of this year. Some analysts believe small drillers will sell out to large operations that have much lower costs maintaining oil production at $40 bbl.

Low oil prices have reduced cash flow for U.S. oil producers and therefore to adjust to lower cash flows, companies have reduced capital expenditures and raised more cash from debt and equity. EIA is predicting that U.S. oil output will drop by 400,000 bpd, the biggest drop since 1989.

In a new report today, Wood Mackenzie said the oil industry will only be able to make half of the 30% savings in upstream costs necessary. More cuts will be needed, jeopardizing future production, the report added.

"Wood Mackenzie's analysis estimates that $1.5 trillion of uncommitted spending on new conventional projects and North American unconventional oil is uneconomic at $50 a barrel," the report said.

George Orwel can be reached at george.orwel@dtn.com