Oil Futures Reverse Higher After US Rig Count Falls

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Reversing earlier losses triggered by a report suggesting the United Arab Emirates is considering leaving the Organization of the Petroleum Exporting Countries, oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Friday's session higher following weekly data on U.S. drilling activity that showed another decline in active oil rigs, suggesting producers are slowing output in response to building inventories.

Oilfield service provider Baker Hughes on Friday said the number of active rigs drilling for oil in the United States declined for a third consecutive week this week, down eight to 592 -- the lowest total in six months.

The data reinforces the view that domestic producers are beginning to pull back on drilling activity amid a slowdown in the manufacturing sector of the U.S. economy, which is responsible for a large chunk of domestic oil consumption. Separate data released earlier this week showed business activity in the manufacturing sector contracted for the fourth consecutive month in February, with the headline index remaining at the lowest level since May 2020 when the economy was under nationwide lockdown.

What's more troubling, input prices paid by the producers jumped 6% from the previous month despite extremely weak demand, meaning parts of the economy are gradually entering into stagflation.

Friday's economic calendar was dominated by the Institute of Supply Management surveys on U.S. services activity that showed more resiliency compared to manufacturing, with the headline index little changed from the prior month at 55.1.

"Business Survey Committee respondents indicated that they are mostly positive about business conditions," said ISM in releasing the data. "Suppliers continue to improve their capacity and logistics, as evidenced by faster deliveries. The employment picture has improved for some industries, despite the tight labor market. Several industries reported continued downsizing."

The headline reading remains highly important, as the central bank wants to cool down the economy, but the markets and the Federal Reserve are paying even closer attention to the Prices Paid component, which reflects inflation. Input prices for service providers unexpectedly declined by 2.2% from the prior month.

Earlier in the session, oil futures came under selling pressure from a Wall Street Journal report suggesting U.A.E. is considering leaving OPEC over its rift with Saudi Arabia.

"Saudi Arabia and the U.A.E. have diverged on several fronts, competing for foreign investment and influence in global oil markets and clashing on the direction of the Yemen war," states the article.

WSJ claims the most intense disagreement between the two Gulf producers is over OPEC+ quotas that obligate the U.A.E. to pump much less oil than it is capable of, hurting its oil revenue. U.A.E. has invested heavily in its oil industry, and has long pushed to pump more oil, but the Saudis have said no, according to OPEC sources cited in the article. The potential for the U.A.E. to leave the OPEC+ coalition and increase oil production unilaterally initially pressed oil prices lower Friday morning, but the oil complex quickly recovered losses in afternoon trading.

On the session, NYMEX West Texas Intermediate April contract advanced $1.52 to $79.68 per barrel (bbl), while the international crude benchmark Brent contract for May delivery gained to $85.83 per bbl, up $1.08 per bbl. NYMEX RBOB April futures pulled higher $0.0504 to $2.7504 per gallon, and ULSD April futures advanced $0.0469 to $2.9131 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges