The Oil Rig Count: A Short-Term Upside for Oil Prices?
The oil rig count
In the week ended October 6, 2017, the US oil rig count fell by two to 748. On a year-over-year basis, the oil rig count rose by 74.8%. However, US crude oil (DBO) (USO) (OIIL) prices fell 0.8% during this period. The rise in the oil rig count likely limited the upside in oil prices. If the oil rig count rises further, it may negatively impact oil prices in the future.
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Oil prices and the oil rig count
US crude oil prices and the oil rig count tend to follow a pattern. The highs and lows in US crude oil prices usually occur three to six months before the highs and the lows of the US oil rig count. US crude oil prices fell to their 12-year low on February 11, 2016. The US oil rig count fell to 316 in the week ended May 27, 2016, the lowest since the week ended October 30, 2009.
Between February 11, 2016, and October 10, 2017, US crude oil active futures rose 94.3%. Also, between May 27, 2016, and October 6, 2017, the oil rig count has almost doubled. The rise in the US oil rig count has increased US crude oil production by 9.5% over this time period. Oil prices followed the same pattern and closed at their 2017 high on February 23, 2017. So, the oil rig count could have topped out in August 2017. In fact, in the week ended August 11, 2017, the oil rig count was 768, which was above its two-year high. This high hasn’t been exceeded since then. Thus, in the short term, the upside in US crude oil production could be limited, which could support crude oil prices.
Moreover, based on the EIA data, oil rig efficiency could have fallen. In October 2017, the new-well oil production per rig could fall 1.7% on a month-over-month basis. These bullish factors could help to support oil prices in the short term. Any upside in oil prices could be important for ETFs such as the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE).