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Crude Oil Up as Rigs Continued to Slide in Week Ended April 17

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WTI crude oil prices and rig counts

Between October 10, 2014, and April 17, 2015, crude oil prices dropped 35%, from $85.82 per barrel to $55.74 per barrel. The number of active oil rigs also reacts to prices. Between October 10, 2014, and April 17, 2015, the number of active crude oil rigs dropped 54%, or 875, to 734.

Last week, oil rigs continued to slide with 34 rigs being idled. Crude oil prices increased ~8%.

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Oil price and rig relationship

When crude prices increase, rig additions may accelerate. When prices fall, rig additions may slow down. For the number of oil rigs to show a clear downtrend, crude oil prices need to fall to levels that make drilling unprofitable. Although this rarely happens, it does occur, as demonstrated by the trend following the 2008 financial crisis.

This scenario has unfolded again recently, as we saw crude prices cut in half over the last eight months. For more on this topic, read Why 2008 crude oil prices, rigs’ fall resemble 2014 scenario.

Rig counts can also affect prices. Just as the record high rigs in the last few years brought on a surge in production and the recent drop in crude prices, fewer rigs today should lead to lower production and thus higher prices in the future.

US producers affected by oil price

US upstream companies that produce oil, such as Continental Resources (CLR) and Hess Corporation (HES), could see lower production growth as a result of reduced drilling. Reduced activity and falling prices can also depress oilfield service companies such as Haliburton (HAL) and Baker Hughes (BHI). Upstream companies push for lower contract rates from oilfield services companies when energy prices fall.

Continental Resources makes up 1.5% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Halliburton and Baker Hughes together account for 17.5% of the VanEck Vectors Oil Services ETF (OIH).

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