Crude prices climb to 2-month high on summer demand prospects, 5th weekly fall in U.S. oil rigs

By Myra P. Saefong and William Watts

The number of active U.S. oil-drilling rigs fell by 6 in the latest week, according to Baker Hughes data

Oil futures climbed on Monday as prospects for strength in summer demand and a fifth consecutive drop in the number of active U.S. oil-drilling rigs helped lift prices to their highest settlement in more than two months.

Price moves

West Texas Intermediate crude CL00 for August delivery CL.1 CLQ24 rose $1.84, or 2.3%, to settle at $83.38 a barrel on the New York Mercantile Exchange. That was the highest front-month contract close since April 26, according to Dow Jones Market Data. September Brent crude BRN00 BRNU24, the global benchmark, rose $1.60, or 1.9%, at $86.60 a barrel on ICE Futures Europe, the highest close since April 30.August gasoline RBQ24 climbed by 3.1% to $2.58 a gallon, while August heating oil added 3.2% to $2.61 a gallon.Natural gas for August delivery NGQ24 settled at $2.48 per million British thermal units, down 4.7%.

Market drivers

Oil traders are "racing to add positions before the widely-expected deficit in the second half of the year," said Manish Raj, managing director at Velandera Energy Partners, told MarketWatch Monday.

"Rumors of lackluster demand had depressed prices, but the summer heat has evaporated those concerns," he said. "Road trips, flight bookings and truck transportation are all going strong, not just in the U.S., but globally."

WTI and Brent each rose nearly 6% in June, recovering from weakness seen early in the month after the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, said they would begin unwinding some voluntary production cuts in October.

Fears of a widening Middle East conflict - as tensions ramped up between Israel and Iran-backed Hezbollah - as well as reminders from OPEC+ officials that they could alter plans, as warranted by the market, helped crude recover, analysts said.

"We continue to hold a supportive view towards Brent, although there are concerns around demand, such as U.S. gasoline demand and Chinese apparent demand," Warren Patterson and Ewa Manthey, commodity strategists at ING, said in a note.

Data from the Energy Information Administration released last week showed a rise in U.S. gasoline stocks as demand fell below 9 million barrels a day in the week ending June 21. It's considered a soft figure, with the summer driving season - the period between Memorial Day and Labor Day - under way.

On the positive side for oil bulls, drilling activity in the U.S. continues to slow, albeit with production near a record. Data from oil-field-services firm Baker Hughes (BKR) on Friday showed the number of active oil rigs fell by six last week to 479, the lowest since December 2021, according to the ING analysts. The number of active oil-drilling rigs has fallen for five weeks in a row, Baker Hughes data show.

In a recent note, Joe DeLaura, global energy strategist at Rabobank, pointed out the OPEC target for returning some oil supplies in the fourth quarter will coincide with a "likely drop in U.S. crude production below 13 million barrels per day."

He noted that U.S. oil-well productivity has been declining for four straight years and that in order to keep production constant, more drilling must occur, but that drilling-rig counts are dropping, with a recent peak in the fourth quarter of 2022.

There's also a roughly five-quarter, or 15- to 18-month, "lag" between operating drilling rigs, aka the Friday Baker Hughes rig count, until oil production begins flowing, DeLaura said.

Rig counts declined throughout 2023 and have recently fallen below 500, he said. "It is the simple, cold reality that fewer active rigs mean less oil production."

Meanwhile, when it comes to natural gas, production is "so strong that we will face a deficit when pigs fly," said Velandera Energy's Raj. "Even the scorching summer power demand is unable to tame the amount of gas in storage."

Also, "although the market is nervous about Hurricane Beryl, we refuse to believe it is likely to cause oil and gas disruptions," he said, adding that energy facilities in the Gulf of Mexico are designed to withstand hurricanes, "barring abnormal conditions."

-Myra P. Saefong -William Watts

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07-01-24 1524ET

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