Crude Oil Commentary

Oil prices fluctuated near the lowest level in more than five weeks as industrial production in the U.S. unexpectedly fell in November. The NYMEX light crude oil price for January delivery on the NYMEX January futures price settled down $1.08 at $93.87/bbl today after U.S. jobless claims unexpectedly declined and manufacturing in the New York region expanded. Prices tumbled 5.2% yesterday, the biggest one-day drop since September.
Drilling rigs in the U.S. are increasingly being directed toward oil and liquids drilling, favoring the higher-cost liquids markets over the weakly priced natural gas markets, but the trend is as of yet providing no signs of support for natural gas price recovery.

Since peaking at 2,023 rigs operating in the U.S. in the week to Oct. 14, the U.S. rotary rig count fell to 1,987 rigs in the week to Dec. 9. Of the total rigs in operation, 41.3% were directed toward natural gas drilling, down from the 46.3% when gas rigs stood at their highest level of 936 rigs.

With only 820 rigs directed toward natural gas in the week to Dec. 9, after steady and substantial weekly losses from Nov. 4 through early December, the anticipation of lost production would present itself as a bullish market signal. However, despite the falling rig count, natural gas prices have fallen sharply from Nov. 4 through Dec. 9 and further through Dec. 14, when the contract fell to a low of $3.155/MMBtu, a level not seen since September 2009.

The pull toward liquids drilling and away from natural gas drilling is in major part the result of the low economic incentive to drill natural gas amid the weak prices, while prices for crude oil and consequently residual liquids remain strong.

About JWM Energy Consultant
Professional Energy Consultant. I advise large energy-users on procurement strategies to reduce electricity and natural gas costs.

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