In the week ended February 27, the total number of rigs drilling for oil in the United States came in at 986, compared with 1,019 in the prior week and 1,430 a year ago. Including 281 other rigs mostly drilling for natural gas, there are a total of 1,267 working rigs in the country, down 43 week-over-week, and down 502 year-over-year. The data come from the latest Baker Hughes Inc. (NYSE: BHI) North American Rotary Rig Count.

The number of rigs drilling for oil fell by 444 year-over-year and by 33 week-over-week. The natural gas rig count declined by nine week-over-week to a total of 280 and by 55 year-over-year.

The week-over-week decline in the oil rig count continues to slow, from 37 in the prior week and 84 the week before that. Since October 10, when the number of oil rigs working in the United States totaled 1,609, the number of oil rigs has dropped by about 39% to 986 rigs.

The impact of this decline in rigs on actual U.S. production is the subject of much speculation. The U.S. Energy Information Administration expects production growth to fall into negative territory by April or May. To most people, that indicates that crude prices will rise beginning in the second half of the year.

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That is clearly the case among hedge fund managers, who piled back into the crude futures market around the first of February and are at least as responsible for rising crude prices as the decline in the number of rigs in the field. Hedge funds — under the Managed Money heading in the Commodity Futures Trading Commission’s (CFTC) Commitments of Traders report — raised their long positions on NYMEX crude by 40,000 contracts between the first of January and the first of February. As of February 24, there are more than 317,000 long positions among the Managed Money players, compared with just 119,000 short positions.

Among the producers themselves, short positions outnumber longs, 390,000 to 264,000, and the difference among swaps dealers is even more tilted toward the shorts.

If the speculators (aka, Managed Money) continue to think long, what could happen is that crude prices will fall instead of rise in the second half of this year. Why? The market signal to producers is that demand is up when in fact it is only demand for paper that is up, not demand for oil. More oil is produced and the expected boost in price disappears under a flood of new production.

The two states losing the most rigs were North Dakota (down 11) and Oklahoma (down nine). Louisiana lost seven and Texas lost six. Alaska added five rigs, the only state to show a positive change in the week.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count dropped by seven to bring the total down to 355. The Eagle Ford Basin in south Texas lost three rigs and now has 157 working, and the Williston Basin (Bakken) in North Dakota and Montana has 111 working rigs, down 12 from the prior week.

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As of Friday, the posted price for Williston Basin sweet crude had dropped from $33.94 a barrel a week ago to $33.44, and Williston Basin sour dipped from $24.83 a barrel to $24.33. Eagle Ford Light crude sold for $46.25 a barrel, down from $46.75 on the previous Friday, the same price as West Texas Intermediate.

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