In the week ended March 18, the number of rigs drilling for oil in the United States totaled 387, compared with 386 in the prior week and 825 a year ago. Including 89 other rigs drilling for natural gas, there are a total of 476 working rigs in the country, down four week over week and down 593 year over year. The data come from the latest Baker Hughes Inc. (NYSE: BHI) North American Rotary Rig Count released on Friday.

West Texas Intermediate (WTI) crude oil for April delivery traded down about 2.1% on Friday to settle at $38.49, a drop of about 2.2% for the week. The U.S. Energy Information Administration (EIA) reported last Wednesday that crude supplies had increased by 1.3 million barrels in the week ended March 11 and that gasoline supplies had fallen by 700,000 barrels.

Market fundamentals remain bearish, but sentiment for rising crude oil prices continues to be bullish, helped along by a steadily weakening dollar. Crude oil, which is priced in dollars, rises as the dollar falls and falls when the dollar rises.

The April WTI contract expires on Monday, and the already heavily traded May contract will become the front month contract. WTI for May delivery closed at $41.13 on Friday, more than $2.50 a barrel higher than April crude. At one point on Friday May crude traded at $42.49 a barrel.

The November 2016 futures contract (seven months out) settled at $43.71 a barrel on Friday, just over $2.50 a barrel higher than the May contract. In late January, the seven-month (September 2016) contract settled at $33.66, $5.67 higher than the front month (February) contract price of $27.99. The difference between the front-month and seventh-month contracts is now narrower by more than $3 a barrel than it was in early February. Typically when that difference narrows, the market is beginning to rebalance.

When current spot prices are lower than futures prices, the market is said to be in contango. When the current spot price rises higher than the futures price, the market is said to be in backwardation. If the crude market is truly rebalancing we should expect to see it continue moving in the direction of backwardation. If the narrowing is due to speculators heading for the exits by covering their short positions, then we might expect to see volatility, with front month contracts rising on rumors and hope and falling on hard news.

What makes the current rise in crude prices hard to accept as a beginning to rebalancing is the fact that production is still about 2 million barrels a day higher than demand and global stockpiles of crude could be as high as 3 billion barrels. No agreement to freeze production at January levels, which were at a record level in Russia and a very high level in Saudi Arabia, will have any impact on daily oversupply.
And even if supply and demand come into balance, the massive inventories could keep prices in check for years. The third lever working against continuing higher prices is the ability of U.S. shale producers to ramp production again once the price shows some stickiness above $40 a barrel.

The number of rigs drilling for oil in the United States is down by 438 year over year and up by one week over week. The natural gas rig count fell from 94 to 89. The count for natural gas rigs is down by 153 year over year. Natural gas for May delivery closed the week at $1.98 per million BTUs, up 17 cents from $1.81 at the end of the prior week. Natural gas posted a 52-week low of $1.61 three weeks ago.

U.S. refineries ran at 89% of capacity, a week-over-week increase of about 85,000 barrels a day. Imports fell by 355,000 barrels a day, to around 7.7 million barrels a day in the week.

Hedge funds — under the Managed Money heading in the Commodity Futures Trading Commission (CFTC) weekly Commitments of Traders report — dumped 18,899 short contracts last week and added 10,795 long contracts. The movement reflects changes as of the March 15 settlement date. Managed money holds 297,622 long positions, compared with 102,677 short positions. Open interest totaled 1,782,857. There were 57 hedge funds with large short positions last week, a decrease of one compared with the prior week. The hedgies have dumped short contracts in large numbers for the past four settlement periods, continuing to push prices higher, anticipating at least a production freeze if not a production cut.

Among the producers themselves, short positions outnumber longs by more than two to one, 438,090 to 170,375. The number of short positions fell by 21,387 contracts last week, and longs dropped by 7,531 positions. Positions among swaps dealers show 237,962 shorts versus 237,940 longs. Swaps dealers cut 24,474 contracts from their long positions last week and added 16,030 short positions.

Among the states, New Mexico dropped two rigs last week while Kansas, North Dakota, Ohio and Oklahoma each dropped one. Texas added two rigs. No other changes were reported.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count remained flat at 152. The Eagle Ford Basin in south Texas added two for a new total of 45, and the Williston Basin (Bakken) in North Dakota and Montana now has 31 working rigs, down one from the prior week.

Enterprise Products Partners L.P. (NYSE: EPD) lists a posted price of $35.89 per barrel for WTI and a March 19 price of $30.28 a barrel for North Dakota Light Sweet. The posted price for a barrel of Eagle Ford crude is $35.84. The price for all three varieties rose by $0.94 a barrel last week. That gain compares to a rise of $2.58 a barrel in the prior week and a rise of $3.14 a barrel two weeks ago for WTI and Eagle Ford. North Dakota crude added $4.27 a barrel two weeks ago.

The pump price of gasoline rose by about 3.3% week over week. Saturday morning’s average price in the United States was $1.981 a gallon, up from $1.917 a week ago.

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