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Rig Count Suggests Production Could Slow Down Faster than Expected

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US crude oil rig count 

On March 11, 2016, Baker Hughes (BHI) released its weekly US crude oil rig count. The US crude oil rig count fell by six to 386 for the week ending March 11, 2016. It had fallen by eight to 392 for the week ending March 4, 2016. The weekly active US crude oil rig count has fallen for 12 straight weeks now. The US crude oil rig count has fallen by 152 rigs so far in 2016.

The US crude oil rig count peaked at 1,609 rigs in October 2014. On the other hand, the US crude oil rig count hit 386 for the week ending March 11, 2016, which is the lowest level since December 2009. The US drilling activity had fallen by 73% since the peak in October 2014. Lower rigs mean oil producers are less optimistic about higher prices in the short term. However, lower rigs also mean lower crude oil production in the future, which is bullish for crude oil prices over the long term. We’ll discuss the crude oil price forecast in more detail in the fifth part of the series.

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Crude oil prices have fallen almost 65% since June 2014 highs. The fall in oil prices affects US oil producers like Hess (HES), Cimarex (XEC), Ultra Petroleum (UPL), and Whiting Petroleum (WLL). US oil producers have higher break-even costs and production costs compared to oil producers in the Middle East and Russia. For more information on US energy companies’ financial woes, read US Oil and Gas Companies’ Debt Exceeds $200 Billion and Crude Oil’s Total Cost of Production Impacts Major Oil Producers.

Impact of fall in drilling activity

The monthly Drilling Productivity Report from the EIA (U.S. Energy Information Administration) reported that US crude oil production from the shale regions could fall by 106,000 bpd (barrels per day) in April 2016 compared to the previous month. The fall in drilling activity affects the performance of oil equipment companies like Schlumberger (SLB), Superior Energy Services (SPN), and Halliburton (HAL).

ETFs 

The roller coaster ride in oil and gas prices impacts ETFs and ETNs like the iShares U.S. Energy ETF (IYE), the iShares U.S. Oil Equipment & Services ETF (IEZ), the Guggenheim S&P 500 Equal Weight Energy (RYE), and the VelocityShares 3x Long Crude Oil ETN (UWTI).

Read the next part of the series to know more about key crude oil price drivers. The series covers Cushing crude oil stocks, the OPEC and Russia meeting, the crude oil price forecast, and the U.S. Commodity Futures Trading Commission report.

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