Oil prices hammered by increase in U.S. rig count

London (Aug 22)  Crude oil prices slumped on Monday as investors cashed in their gains on growing fear the rise in oil prices will prompt more U.S. shale oil players to return to the oil patch.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September CLU6, -2.70%  slid $1.31, or 2.7%, to $47.21 a barrel. October Brent crude on London’s ICE Futures exchange LCOV6, -3.05%  fell $1.56, or 3.1%, to $49.32 a barrel.

Growing expectations that heavyweight oil producers — members and non-members of the Organization of the Petroleum Exporting Countries — might reconsider a production freeze at their meeting next month sent prices soaring last week, pushing the oil market back into a bull market and Brent oil prices above the $50 per barrel threshold.

Read: Why oil prices just stampeded into bull-market territory

However, the optimism is fizzling out as more market participants believe the chatter of a production freeze is going to stay just that, and the producers would not pledge to stabilize prices.

“It seems like the producers are just paying lip service,” said Vyanne Lai, the energy analyst at the National Australia Bank.

Analysts at Morgan Stanley also said a deal remains “highly unlikely,” as there are too many headwinds and logistical challenges.

“The market treats OPEC as the central banker of oil where simple jawboning can move markets and scare off shorts,” said strategists led by the bank’s head of energy commodity research, Adam Longson.

“With more than a month until the International Energy Forum in Algeria, markets may lose interest in prognosticating a deal. However, as the meeting approaches, it would not be surprising if market chatter and volatility increased,” they added.

Read: Morgan Stanley throws cold water on hopes of any OPEC freeze deal

Overproduction, driven by producers’ aim to expand market shares, has caused prices to tank in the past two years to as low as $26 per barrel in February. While prices have clawed back significantly, they are still much lower than the above-$100 threshold seen in mid-2014, a level that analysts say will be hard to reclaim given the overhang of product.

Moreover, as prices inch higher, more U.S. shale producers are enticed to head back to oil fields. According to data provided by industry group Baker Hughes BHI, +1.25% the number of active oil rigs in the U.S. rose by 10 last week, bringing the total to 406.

The U.S. oil-rig count is typically viewed as a proxy for activity in the sector. After peaking at 1,609 in October 2014, low oil prices put downward pressure on production and the rig count fell sharply. But the oil-rig count is up roughly 28% in the past three months.

“There are many conflicting factors at the moment and prices are expected to be choppy [ahead of the OPEC meeting],” said Barnabas Gan, an economist at the Singapore-based OCBC.

He noted the reports that Iraq is gearing up to increase its oil exports by 5% in the next few days also bodes badly for market sentiment.

A stronger U.S. dollar also contributed to Monday’s decline. The WSJ Dollar Index BUXX, +0.23% which gauges the dollar against a basket of 16 currencies, was last up 0.3% at 85.81. As oil business is conducted in the greenback, a stronger dollar means higher prices for foreign traders.

Nymex reformulated gasoline blendstock for September RBU6, -2.52%  — the benchmark gasoline contract — fell 2.5% to $1.47 a gallon, while natural gas for the same month NGU16, +1.97%  rose 1.6% to $2.63 per million British thermal units.

Source: MarketWatch