By Timothy Puko
The amount of rigs drilling for oil in the U.S. rose for the
first time in seven months, triggering a slump in crude oil prices
to their lowest settlement in two months.
U.S. oil producers added 12 rigs last week, breaking 29 straight
weeks of cuts, in response to prices that have rebound to- and
stayed at $60 a barrel since late April. That convinced producers
to end months of massive cutbacks that started after the U.S. shale
drilling boom flooded the market and sent prices crashing.
But the increase in rigs is scaring investors and analysts who
have warned that oil could be on the verge of another sharp fall.
Production has kept making small gains even as drilling has
declined and stockpiles have hit historic levels around the world.
If rigs get back to work, that could keep the market flooded with
oil, a concern that built strong momentum this week.
On Wednesday, the U.S. benchmark price broke below a $4 range it
had traded in for two months. That jolt came after the U.S. Energy
Information Administration reported domestic oil stockpiles
unexpectedly rose for the first time in nine weeks.
Those drilling-rig cuts have slowed dramatically in recent
weeks, and last week's increase is a sign the market may stay
oversupplied and head for a "replay" of the past year's steep fall
in prices, said John Kilduff, founding partner of Again Capital in
New York, which invests in energy commodities.
"It seems to be a definitive break in the trend and it's
definitely registering in the market," he added. "The rig count's
going up, but the production, after all the past cuts, isn't going
down either. This is a week of very bearish news for the oil
market."
On Thursday, the U.S. benchmark price fell 3 cents, or 0.1%, to
$56.93 a barrel on the New York Mercantile Exchange. The losses are
small, but came after crude rose as high as $57.97 late Thursday
morning.
U.S. oil lost 4.5% on the week, its largest one-week decline
since early March. Its settlement was the lowest since April
22.
Brent, the global benchmark also pared Thursday's gains back to
6 cents, or 0.1%, to $62.07a barrel on ICE Futures Europe.
Oil prices fell by more than half from last summer, and drilling
followed, with about 60% fewer rigs working since a peak of 1,609
in October. Oil prices rebounded in the early spring, but many
analysts and investors say the price rebound was based largely on
speculation that the cutbacks in working rigs would lead to
declines in production.
Pioneer Natural Resources Co. is among several U.S. shale
producers that said they would begin ramping up after seeing the
price of oil stay at or near $60 a barrel for several weeks.
Pioneer is in the process of adding two rigs in the Permian Basin
in Texas and the company plans to add two rigs a month through
March 2016, a spokesman said.
"Any bump up in prices and they start putting straws in the
ground," said Tim Rudderow, president of Mount Lucas Management,
which oversees $1.7 billion. Mr. Rudderow had said last week he was
skeptical oil production would slow like many bulls are expecting
and that he was trading options that would pay off with a slow
decline in crude futures.
Crude stocks remain near levels not seen for this time of year
in at least the last 80 years, the EIA said.
Negotiations over the Iranian nuclear deal continue to drag on
the market as well, after the West and Tehran extended their
self-imposed deadline earlier this week. A final agreement to curb
Iran's nuclear program is expected to pave the way for the lifting
of Western sanctions and release more Iranian crude on the global
market.
"We are going into the second half of this year with a heavily
oversupplied fundamental picture, which makes any bullish price
forecast hard to accept," David Hufton of PVM brokerage said.
In refined products, gasoline ended up 2.75 cents, or 1.4%, at
$2.0343 a gallon on the Nymex, while diesel gained 0.06 cent, or
0.03%, to $1.8399 a gallon.
Georgi Kantchev, Angela Chen and Erin Ailworth contributed to
this article.
Write to Timothy Puko at tim.puko@wsj.com