uploads///How Rig Count Follows Crude Oil Prices

How Are Crude Oil Prices Related to the Rig Count?



Oil rig count lower for seven consecutive weeks

Crude oil production has dipped by 8.1% from its peak. On May 6, 2016, crude oil prices were ~59% below their highs on June 20, 2014. Since then, crude oil prices started to fall due to oversupply. The US oil rig count fell for seven consecutive weeks, according to data released by Baker Hughes (BHI) on May 6, 2016.

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Rig count and crude oil prices

Over the last ten years, the oil rig count and crude oil price bottoms have been between three to four months apart, according to research from Morgan Stanley. After the sub-prime crisis, when crude oil (USO) (UWTI) (SCO) touched multiyear lows in January 2009, the rig count bottomed out in May 2009. If this timeframe applied today, the rig count number should hit its bottom by June 2016. Crude oil (OIL) touched a 12-year low on February 11, 2016, before rebounding 68.6% as of May 11.

Why the rig count is important to oil-weighted stocks

Upstream companies’ reduction in capital expenditure is directly reflected in the rig count fall. This has just started to show in US crude oil production, which has dropped ~5.9% since its peak of 9.7 MMbpd in April 2015. If the rig count bottoms out and starts to rise again, it will be an indication that upstream companies are starting to increase drilling activity again, which could eventually result in higher crude oil production. This will weigh on crude oil prices and could be an important factor for oil-weighted stocks such as Synergy Resources (SYRG), Carrizo Oil & Gas (CRZO), Bonanza Creek Energy (BCEI), and Halcón Resources (HK).


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