The Come Back

Everyone is talking about the comeback! No! Not Tiger Woods and his master’s win. We are talking about the comeback in rig counts. Ok, maybe not everyone is talking about it. Baker Hughes made it two weeks in a row by reporting that the U.S. oil rig count increased by +2 to 833 last week, but overall the rig count fell. The rig count is only 18 rigs higher than a year ago but down from where we were in the beginning of the year.

Of course, the real reason oil has been strong has been the combination of strong demand and tighter supply. U.S. shale producers, despite the rig count increase, are still in contraction mode. This comes as Russia drops hints of another production war. Reuters is reporting that Russia and OPEC may decide to boost production to fight for market share with the United States, but this would push oil prices as low as $40 per barrel, TASS news agency cited Russia's Finance Minister Anton Siluanov as saying on Saturday. "There is a dilemma. What should we do with OPEC: should we lose the market, which is being occupied by the Americans, or quit the deal?" Anton Siluanov said, TASS reported.

"(If the deal is abandoned) the oil prices will go down, then the new investments will shrink, American output will be lower because the production cost for shale oil is higher than for traditional output." Siluanov said “oil prices could drop to $40 per barrel or even less for up to one year. The minister said there had been no decision on the deal yet and he did not know whether OPEC countries would be happy with this scenario.”

Still, talk from Russia about a production war is just talk at this point. Russia is signaling that they want to raise output in June unless we see a cutback in U.S. oil production. That may happen and perhaps the Russians believe that if they can scare shale producers into not making investments, they can effectively maintain their market share.

Oil is still looking at geopolitical risk factors as well. The Telegraph reports that ”Italy and France are at daggers drawn, pitted on opposite sides in an escalating battle for control of Libya and the oil fields of the upper Sahara. Astonishing details have come to light indicating that French president Emmanuel Macron secretly endorsed a military campaign to overthrow the UN-backed government in Tripoli on the eve of an international peace conference, effectively working in league with Russia and Saudi Arabia against global consensus. It also makes a mockery of the EU’s foreign policy institutions.”

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