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Is It Time for Oil’s Bull Run?

PART:
1 2 3 4 5
Part 2
Is It Time for Oil’s Bull Run? PART 2 OF 5

Could Oil Rig Count Limit Oil’s Upside?

The US oil rig count

In the week ended October 27, 2017, the US oil rig count was up by one to 737. However, it was 31 below its more than two-year high of 768 in the week ended August 11, 2017. Between August 11, 2017, and October 31, 2017, US crude oil active futures rose 11.4%. The fall in the oil rig count could mean weaker oil supply in the future, which could have a positive impact on oil prices.

Could Oil Rig Count Limit Oil’s Upside?

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US crude oil production

Over the last decade, the tops and bottoms for the oil rig count and US crude oil prices were three to six months apart with oil prices leading. For example, US crude oil (UCO) (USL) plunged to its 12-year low on February 11, 2016. After a gap of three months in the week ended May 27, 2016, the oil rig count fell to 316­, the lowest since October 30, 2009.

Between February 11, 2016, and October 31, 2017, US crude oil active futures rose 107.5%. The oil rig count has almost doubled since May 27, 2016. An upsurge in the oil rig count has made US crude oil production rise by 8.8%. This pattern could be of paramount importance to energy ETFs like the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE).

However, US crude oil prices are near 2017 highs as discussed in the previous part. Higher prices could encourage US oil producers to put more oil rigs back to work in order take advantage of higher oil prices, which may increase US crude oil production and make oil bulls rethink their position.

However, EIA data could indicate a possible ~1%  fall in the new-well oil production per rig in November 2017 compared to a month before, and the 0.3% fall in US crude oil production in August on a month-over-month basis could benefit oil prices in the short term.

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