uploads///How are Crude Oil Prices Production and Rig Counts Related

How Are Crude Oil Prices, Rig Count, and Production Related?



Oil rig counts rose

The US oil rig count was 325, nine more than in the previous week, according to data released by Baker Hughes (BHI) for the week ending June 3, 2016. Crude oil production fell by 10.0% from its peak in June 2015, according to weekly data. On June 7, 2016, crude oil prices were ~53.0% below their highs from June 20, 2014. Since then, crude oil prices have started to fall due to oversupply.

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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 subprime crisis, when crude oil (USO) (UWTI) (SCO) (UCO) touched multiyear lows in January 2009, the rig count bottomed out in May 2009. According to this timeframe, the rig count should hit its bottom by June 2016. Crude oil (OIIL) touched a 12-year low on February 11, 2016, before rebounding 92.1% as of June 7, 2016. Oil rigs rose for the first time in 11 weeks in the week ending June 3.

Why the rig count is important to oil-weighted stocks

Upstream companies’ reduction in capital expenditure has resulted in a lower rig count and a drop in US crude oil production. Crude oil production is down ~10.0% from its peak of 9.6 million barrels per day in June 2015, according to weekly data. 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. This could eventually result in higher crude oil production. 

Higher production 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 Halcon Resources (HK).


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