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Oil Near ‘Sweet Spot’ Puts 70-Year-Old U.S. Index in Focus

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The oil market is turning its attention back to the U.S. as more of its rigs return to work following a surge to $50 a barrel, raising concern that a production rebound may stifle crude’s recovery.

“All eyes” are on the U.S. response to higher prices, Morgan Stanley said in a report Monday, adding that the trend in rig numbers will be closely watched in the coming months. Drillers returned nine machines to operation last week, the biggest gain since December and only the second addition this year, according to Baker Hughes Inc., which has been compiling the data since 1944.


“The biggest concern for prices going forward is whether the rig count will continue to pick up over the next few weeks,” Angus Nicholson, a markets analyst in Melbourne at IG Ltd., said by phone. “If we start to see a trend — three to four weeks of increases — there will be heightened concerns in the market and perhaps prompt a bit of a pullback to $40 a barrel or below.”

Oil has surged from a 12-year low earlier this year, putting it within range of a “sweet spot” for shale output that Citigroup Inc. sees between $50 to $70 a barrel. Prices have gained amid disruptions to global supply and a slide in U.S. production, with 500,000 barrels a day cut from the market as the rig count fell to the lowest level since 2009.

West Texas Intermediate oil for July delivery climbed 2.2 percent to settle at $49.69 a barrel on the New York Mercantile Exchange, the highest close since July 21.

Drill Lag

The rig count doesn’t respond immediately to price signals and there is typically a delay of three to four months, Morgan Stanley analysts including Adam Longson wrote in Monday’s note. While the increase in drilling is not enough to materially change the outlook, there is some evidence that drilling is returning to the “best” acreage, they wrote.

A boost in shale supply could help reverse this year’s declines in U.S. production. Drilled but uncompleted wells could return 500,000 barrels a day to the market, Richard Westerdale, a director of policy analysis at the U.S. State Department’s Bureau of Energy Resources, said at conference in April.

Prices need to be above $50 a barrel for more crude supplies to return, Saudi Arabia’s Oil Minister Khalid Al-Falih said in Vienna last week after attending the biannual meeting of the Organization of Petroleum Exporting Countries. The kingdom is not against shale development and would like to see more, though at levels that don’t disrupt the market balance, he said.

U.S. production is forecast to average 8.6 million barrels a day this year, compared with 9.4 million a day in 2015, according to estimates from Energy Information Administration. Output slid to 8.74 million barrels a day through May 27, the lowest since September 2014, according to weekly EIA data.

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