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Are Traders Overestimating the Rise of Oil?

PART:
1 2 3 4 5
Part 2
Are Traders Overestimating the Rise of Oil? PART 2 OF 5

Oil Rigs: Will Oil Prices Be Their Undoing?

US oil rig count

In the week ended November 3, 2017, the US oil rig count fell by 8 to 729. In the last 12 weeks since the week ended August 11, 2017, the US oil rig count has risen only twice. The count fell 39 between August 11 and November 3, 2017. Over that period, US crude oil prices rose 17.2%. The fall in the US oil rig count has helped raise oil prices.

Oil Rigs: Will Oil Prices Be Their Undoing?

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US crude oil production

US crude oil prices and the oil rig count’s top and bottom have usually been three to six months apart. Rigs usually take cues from oil prices. On February 11, 2016, US crude oil prices were at their 12-year low closing price. In the week of May 27, 2016, the US oil rig count fell to 316, the lowest in the last six-and-a-half years.

Between February 11, 2016, and November 7, 2017, US crude oil prices have more than doubled. From the low of 316, the count has more than doubled. Over this time period, US crude oil production has risen 9.4%. So a rise in oil rigs could increase oil supplies.

The recent bullish oil prices could cause a recovery in the US oil rig count as well. We looked at US crude oil prices in the previous part. It could increase US crude oil production, which in turn could cap the gain in oil prices. This relationship may hit broader equity market indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) in the coming days since oil stocks form part of these indexes. Energy ETFs such as the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE) may not escape this relationship either.

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