X
<

Oil’s Recovery: Is It a Bull Trap or Are Bears in Hibernation?

PART:
1 2 3 4
Part 2
Oil’s Recovery: Is It a Bull Trap or Are Bears in Hibernation? PART 2 OF 4

Oil Rigs: Will They Make Oil Recovery a Bull Trap?

US crude oil rig count

In the week ended June 23, 2017, the US oil rig count rose by 11 and touched 758. It was the highest US oil rig count since April 17, 2015. But, in April 2015, US crude oil active futures averaged around $54.63 per barrel compared to $45.19 per barrel in June 2017 to date.

Oil Rigs: Will They Make Oil Recovery a Bull Trap?

Interested in FENY? Don't miss the next report.

Receive e-mail alerts for new research on FENY

Success! You are now receiving e-mail alerts for new research. A temporary password for your new Market Realist account has been sent to your e-mail address.

Success! has been added to your Ticker Alerts.

Success! has been added to your Ticker Alerts. Subscriptions can be managed in your user profile.

US crude oil producers are adding rigs even at lower oil prices. If the oil rig count keeps rising, it could mean trouble for oil bulls because crude oil supply could keep increasing even as prices are weak.

As of June 27, 2017, US crude oil (USL) (DBO) (UCO) active futures had fallen 58.8% from their high in June 2014. Between these two dates, the oil rig count fell 50.9%. In the week ended June 16, 2017, US oil production was just 2.7% below the record level of 9.6 million barrels per day, which it hit in the week ended June 5, 2015.

US oil production and oil prices

There is an important relationship between oil rig count and oil prices. In the last ten years, the peaks and bottoms in oil prices were succeeded by the highs and lows in US oil rig count with a usual space of 3–6 months.

In such an instance in December 2008, US crude oil active futures recorded a multiyear low. Afer about five and a half months, the US oil rig count also fell to a multiyear low.

Again in February 2016, oil prices made a new 12-year low. Consequently, the US crude oil rig count fell to a multiyear low of 316 in the week ended May 27, 2016. Since its multiyear low closing price in February 2016 to date, US crude oil active futures rose 68.8%.

Since May 27, 2016, to date, the US oil rig count rose 442, and US production rose 7%. In the week ended June 16, 2017, US oil production was at 9.4 million barrels per day, the highest since the week ended August 14, 2015.

The oil rig count is at two-year highs, while US oil production is just below its two-year high. Because of this, on June 27, 2017, US crude oil active futures were just 4% above their 10-month low.

Rising rig efficiency could also increase crude oil supplies. According to EIA’s Drilling and Productivity report, in July 2017, new-well oil production per rig could increase 29.1% compared to the same period last year. The US oil rig count and rising efficiency could be a lethal combination for crude oil prices.

Lower oil prices could impact returns of energy ETFs like the Fidelity MSCI Energy ETF (FENY) and the Direxion Daily S&P Oil & Gas Exploration & Production Bull and Bear 3X ETF (DRIP).

X

Please select a profession that best describes you: