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US Crude Oil Rig Count Could Fuel Pessimistic Sentiments

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US crude oil rig count rises

Baker Hughes will release the weekly crude oil rig count report on August 14, 2015. Last week, the data showed that the weekly crude oil rig count rose by six to 670 for the week ending August 7, 2015. The oil rig count rose for the third straight week despite the fall in oil prices. During this period, crude oil rigs rose by 32 rigs. In contrast, oil rigs fell for 30 weeks in the last 35 weeks.

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Impact

Crude oil prices fell more than 30% from the peak of $62 per barrel in May 2015 due to oversupply concerns. However, drilling activity rises with the rise in crude oil prices. Oil rigs rose during this period. The possible reason could be that oil companies are drilling more to offset lower crude oil prices.

Secondly, there’s a dramatic fall in the drilling contracts price due to the long-term lower crude oil prices. Thirdly, the long-term lower crude prices might have led to drilling efficiency methods in order to sustain the uncertain crude oil market. This is good news for oil drillers like Schlumberger (SLB), Superior (SPN), and Halliburton (HAL). Currently, crude oil rigs are 57.80% lower than the level of 1,588 rigs last year.

Historically, lower crude oil prices promote consumption and prices rise and stabilize over a period. In this scenario, even if lower crude oil prices lead to a fall in drilling activity, countries like Iran, which has huge crude oil reserves and low production and breakeven cost around $15 per barrel, could step up production as soon as western oil sanctions are removed. They could extend the crude oil glut. The US drilling activity fell more than 60% from the peak of 1,609 in October 2014 to 628 in June 2015 due to the mammoth fall in oil prices since June 2014. Oil prices fell almost 60% over this period.

The volatile crude oil prices impact energy ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE).

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