Falling U.S. oil output not enticing enough for wary investors

NEW YORK (Bloomberg) -- Not even a sharp decline in U.S. oil production can convince investors that crude prices are ready to rebound.

 

Stubbornly high U.S. inventories and resurgent output from OPEC, Russia and Canada have prompted money managers to cut bets on rising prices to the lowest level in four months. West Texas Intermediate crude fell last week even as U.S. government data showed output slid to the least since May 2014.  

 

“The problem is that OPEC more than makes up for every barrel of lost U.S. production,” said Stephen Schork, president of the Schork Group Inc., a consulting company in Villanova, Pennsylvania.

 

U.S. production tumbled 194,000 bopd to 8.43 MMbopd in the week ended July 1, an Energy Information Administration report showed. Output has slumped 12% from the four-decade peak reached in June 2015. The Organization of Petroleum Exporting Countries boosted production 0.7% to 32.9 MMbopd in June, according to Bloomberg estimates. 

 

Inventory Levels

 

WTI fell July 7 after the EIA said U.S. crude supplies shrank by a smaller-than-projected 2.22 MMbbl to 524.4 MMbbl. Inventories remain at the highest seasonal level in at least a decade. Crude imports averaged 8 MMbpd in the four weeks ended July 1, up 12% from a year earlier.

 

“While U.S. production looks weak, there’s only been a modest decline in U.S. inventories,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The offsetting factor has been very robust imports.”

 

Money managers cut net long wagers on WTI to the lowest since March in the week ended July 5, according to Commodity Futures Trading Commission data. WTI dropped 2.6% to $46.60/bbl in the report week. Prices on Monday decreased 56 cents to $44.85 at 1:40 p.m. in New York.

 

Iranian production has surged 25% this year to an average 3.5 MMbopd, data compiled by Bloomberg show. Iran plans to pump 4 MMbpd by year-end and reach 4.8 MMbpd within five years, Oil Minister Bijan Namdar Zanganeh said June 3 in Vienna.

 

Russian Gains

 

Russia exported an average 5.55 MMbopd in the first half of 2016, up 4.9% from last year. It pumped 10.84 MMbopd last month, up 1.1% from a year earlier, Energy Ministry data show.

 

Canadian oil-sands producers are restoring production after the worst wildfires in Alberta’s history. Suncor Energy Inc. and Syncrude Canada Ltd. are among the producers that have brought back more than a million barrels a day.

 

Hedge funds’ net-long position in WTI fell by 9,931 futures and options combined to 169,499, the sixth decline in seven weeks, CFTC data showed. Shorts, or bets on falling prices, increased 8.4%, while longs decreased 0.3%.

 

In the Brent market, money managers reduced bullish bets by 14,787 contracts in the week, according to data from ICE Futures Europe. Bets that prices will rise outnumbered short positions by 312,270 lots, the least since February, the London-based exchange said in a report.

 

Drillers Return

 

The decline in U.S. production might end if drillers keep returning rigs to their fields, according to Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $133 billion of assets. The number of active oil rigs in the U.S. has increased in five of the past six weeks, Baker Hughes Inc. data show.

 

“You have to be worried about the uptick in the rig count and what that will mean for production," Haworth said. “If this continues, the decline in output will come to an end.”