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Is a U-Turn in Oil Prices Possible?

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Part 2
Is a U-Turn in Oil Prices Possible? PART 2 OF 4

Why Oil Prices Could Plunge

Oil rig data

The US oil rig count rose by seven to 763 in the week ended July 7, 2017. This was the rig count’s highest level since April 10, 2015. 

On a year-over-year (or YoY) basis, the US oil rig count has doubled, and oil prices have fallen 10.8%. This difference could spell trouble for long bets on crude oil futures.

Why Oil Prices Could Plunge

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How the oil rig count affects crude oil production

US crude oil production topped 9.6 million barrels per day in the week ended June 5, 2015. Since then, US crude oil production has fallen 2.8%. US crude oil active futures have fallen 58% from their June 2014 highs. Since June 20, 2014, the number of oil rigs has fallen 50.6%. The downturn in oil prices since June 2014 has cut the number of active oil rigs, and it’s also affected US crude oil production.

Why this pattern is crucial

Since 2007, the lows and highs in US crude oil (USL) (DBO) (OIIL) active futures have usually been three to six months earlier than the lows and highs in the US oil rig count. For example, in December 2008, US crude oil active futures settled at a multiyear low. In June 2009, the oil rig count fell to its multiyear low.

Again, in February 2016, US crude oil active futures fell to a 12-year low. Since then, oil prices have risen 69.4%. The US oil rig count bottomed in the week ended May 27, 2016. Since its low of 316, the US oil rig count has risen by 447, and US crude oil production has risen 6.9% during the same period.

Will US crude oil production rise sharply?

According to the EIA’s (U.S. Energy Information Administration) Drilling Productivity Report, new oil production per rig will rise 29.1% YoY in July 2017. A rise in both the US oil rig count and rig efficiency could mean a sharp rise in US crude oil production. Such a rise could pressure crude oil prices and be of concern for ETFs such as the Fidelity MSCI Energy ETF (FENY) and the Guggenheim S&P 500 Equal Weight Energy ETF (RYE).

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