WTI crude prices are being influenced on both ends of the spectrum. While a renewed rally in the U.S. Dollar index exerts downward pressure on crude prices, a strong belief by market analysts that OPEC and non-OPEC members will actually hold true to their cutbacks in January (which would indeed cause a physical decrease in global product) pumps bullish sentiments into the market and continues to prop up prices. Currently, WTI crude is trading on the NYMEX at an even $52.
Continuing the theme from Friday’s post, let’s focus in on the U.S. today. During the last 3 months we have seen a slow, yet constant, uptick in the price of crude oil. Inevitably, this has caused an increase in the number of rigs coming back online, as well as a number of new rigs being added into the mix. Although we are still 541 active drilling rigs short of where we were a year ago, the rig count has steadily increased for seven straight weeks to the highest number (510) since January.
Where are all these rigs? I’m glad you asked. There is an article currently published on CNBC.com titled Land Rush! which goes into detail about the current state of the Permian Basin. As you can see from the map below visualizing the areas of the U.S. where the majority of crude oil and natural gas production takes place, the Permian Basin is a very large sedimentary basin containing large deposits of both oil and natural gas. This basin—comprised of three main parts: the Midland Basin, Delaware Basin, and the Marfa Basin—lies beneath parts of western Texas and the southeastern part of New Mexico.
Now, this article is mainly about the recent surge in land prices in the Permian Basin and what domino effects could come from that, but of greater interest are the charts and graphs that show the increase in drilling activity. The Baker Hughes chart below shows the quarterly increase in rig counts in the U.S.
Graphically, Q1 and Q2 show a strong correlation between active rig counts and the price of crude oil. Additionally, we know from rig count reports that rigs were up in Q3 and that Q4 will also be on the positive side.
What does this all mean? Well, the recent deal between OPEC and non-OPEC members to cut production starting January 2017 does not include the U.S. Therefore, in a perfect world, where global supply shrinks and crude prices climb, the U.S. will continue to drill, produce oil, add jobs, increase GDP, and remain the world’s largest producer of crude oil. Good job America.
Currently, both RBOB and ULSD are holding steady down 13 points each.