U.S. energy sector gains drag on oil prices

Oil prices inched lower in response to the latest U.S. rig count, even if the geopolitical risk from Yemeni violence on Monday is factored in.
By Daniel J. Graeber  |  Dec. 4, 2017 at 10:03 AM
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Dec. 4 (UPI) -- Steady improvements in the North American energy sector and a forecast about a geopolitical risk premium sent crude oil prices lower early Monday.

Members of the Organization of Petroleum Exporting Countries and non-member states like Russia agreed last week to extend a production cut agreement credited with supporting crude oil prices to the end of 2018. The measure is aimed at draining the surplus from the five-year average in global crude oil inventories, and Saudi Arabia's energy minister said the work is only halfway done.

High U.S. oil production and a previous OPEC policy of defending a market position with robust output sent oil prices plummeting below $30 per barrel last year. With OPEC under restraints, U.S. oil is left as one of the main spoilers.

Drilling services company Baker Hughes said the U.S. rig count as of Dec. 1 was six higher than the previous week at 929. Canadian drillers added seven from the previous week to reach 222. For the United States, there are at least 300 more rigs actively exploring for or drilling for oil and gas than last year. While not indicative of higher production in and of itself, the increased rig count is a clear sign of optimism in U.S. shale.

The price for Brent crude oil was down 0.86 percent as of 9:10 a.m. EST to $63.18 per barrel. West Texas Intermediate, the U.S. benchmark for the price of oil, was down 0.94 percent to $57.81 per barrel.

The spread, or difference, between Brent and WTI means U.S. oil is competitive in some markets, making it possible for U.S. crude oil exports to increase.

The drop in crude oil prices came amid reports early Monday that former Yemeni President Ali Abdullah Saleh was killed during fighting in the nation's capital, Sanaa. While not a major oil producer, Yemen's geographical position means its waters can be a chokepoint for the flow of global goods and therefore could add a risk premium to the price for crude oil.

Tamas Varga, an analyst with London oil broker PVM, said in an emailed report Monday that there may already be a $2 to $3 premium on crude oil prices because of geopolitical risk in the Middle East.

"Ignoring geopolitics, the $55 to $65 per barrel price band seems reasonable for the coming six months," he said.

Last week, Vagit Alekperov, the head of Russian oil company Lukoil, said that, for ministers from OPEC and non-members, the mid-$60 range was preferable for now.

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