Oil prices post gain as output declines
The flagging recovery in crude oil prices got a boost Wednesday, when government data showed a largerthan-expected decline in oil inventories and a drop in production.
Those reports moved oil markets higher and ended a five-day losing streak after an early May rally that sent U.S. benchmark crude above $60 per barrel.
The U.S. benchmark, a contract for July delivery of West Texas Intermediate crude, gained 99 cents Wednesday to $58.98 per barrel on the New York Mercantile Exchange. London-traded Brent crude tacked on $1.01 to $65.03 a barrel.
Although U.S. crude has stalled in its rise from a six-year low of $43.46 in March, some analysts are
seeing reasons for optimism that the lowest prices may be in the past.
“The worst is certainly behind us,” said Bill Herbert, an analyst at Houston energy investment bank Simmons & Company International.
The U.S. Energy Information Administration’s weekly petroleum report showed a 2.7-millionbarrel draw from crude oil stocks last week. Market analysts surveyed by Bloomberg, on average, expected a draw of 730,000 barrels. Commercial stores of crude have fallen in each of the past three weeks from a late-April high of 490.9 million barrels.
Herbert cautioned, however, that U.S. exploration and production companies are positioning themselves to ramp up output now that prices have improved from their winter lows, which could keep the prices from rising much in the months ahead.
“Most E&Ps now are saying that at $60 to $65 dollars per barrel, they’re going to start increasing their reinvestment activity,” Herbert said.
U.S. daily production fell last week by 112,000 barrels to 9.26 million barrels per day, the largest decline since July, according to an estimate by the Energy Information Administration.
But the U.S. production surge that changed the international energy landscape and contributed to falling prices has been slow to retreat, even though the number of rigs searching for U.S. oil has fallen to 660 from 1,609 in October.
“The last time we were at this rig count we were producing 40 percent less oil,” said Rob Haworth, an investment strategist at U.S. Bank Wealth Management. Although Wednesday’s reports contained some bullish signs, he said, the price uptick was modest.
A year ago Wednesday, U.S. crude went for $102.44 per barrel, and the slide that began last summer has prompted millions of dollars in budget cuts and tens of thousands of layoffs.
That trend continued this week as Houstonbased shallow water driller Hercules Offshore said it’s idled or sold half of its Gulf of Mexico jack-up rigs, and Transocean said it has put three more of its deepwater rigs into mothballs.
Hercules CEO John Rynd said on a call with investors that producers aren’t seeking out many new rig contracts.
“There have been some extensions,” he said, “but as far as incremental demand, it’s been almost over half of what it was last year, and you have about 180 jack-ups this year rolling off primary term with the contracts.”
The oil downturn has been much kinder to refiners.
In April, refiners could buy international benchmark crude for $1.41 a gallon and sell gasoline made from it for $1.79 per gallon in the New York area, a 38cent spread that was the highest for April in eight years, according to an analysis by the Energy Information Administration.
San Antonio-based Valero Energy Corp., the nation’s largest independent refiner, posted first-quarter earnings 16 percent higher than a year earlier as it ran more low-cost crude through its refineries. During an April call with investors, company executives reported processing 9,000 barrels more per day than in the first quarter of 2014.