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How Is Rise in US Crude Oil Rig Count Bearish for Prices?

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Weekly US crude oil rig count

On September 16, 2016, Baker Hughes (BHI) released its US crude oil rig count. It reported that the US crude oil rig count rose by two to 416 rigs between September 9 and September 16, 2016. The US crude oil rig count rose for the 11th time in the last 12 weeks for the week ending September 16. The number of active rigs rose on the back of higher crude oil prices earlier this year.

This rise in the rig count could slow down the pace of US crude oil production and pressure crude oil prices again. For more on prices, read part one of this series.

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The rise in US drilling activity will positively impact oil production. It could also positively impact the revenues of companies such as Diamond Offshore Drilling (DO), Transocean (RIG), Cobalt International Energy (CIE), Baker Hughes, and Laredo Petroleum (LPI). The US crude oil rig count has fallen 35.4% YoY (year-over-year), but it has risen 0.5% week-over-week.

US crude oil rig count’s peaks and lows  

The US crude oil rig count peaked at 1,609 in October 2014. In contrast, it hit 316 in the week ending May 27, 2016, which was the lowest level since the 1940s. US drilling activity fell due to lower crude oil prices. The lower prices were due to oversupply.

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EIA’s monthly drilling report 

The EIA (U.S. Energy Information Administration) released its Drilling Productivity report on September 12, 2016. It reported that US crude oil production would fall in the seven shale regions by 61,000 bpd (barrels per day) to 4.4 million bpd in October 2016 compared to the previous month. Production is expected to fall in the Eagle Ford and Bakken Shale regions during the same period.

Monthly international rig count  

Baker Hughes’s international oil rig count excludes data in the US and Canada. It showed that oil rigs rose by three rigs to 680 for July 2016 compared to the previous month. The count rose 0.4% month-over-month. However, it fell by 169 rigs, or 19.9%, YoY.

Impact on ETFs  

The roller coaster ride in oil and gas prices impacts oil producers and drillers. It also impacts funds such as the iShares Global Energy (IXC), the iShares U.S. Energy ETF (IYE), the VelocityShares 3x Long Crude Oil ETN (UWTI), the United States 12 Month Oil ETF (USL), the Fidelity MSCI Energy ETF (FENY), the ProShares Ultra Bloomberg Crude Oil ETF (UCO), and the PowerShares DWA Energy Momentum ETF (PXI).

In the next part of this series, we’ll take a look at the Commodity Futures Trading Commission’s Commitments of Traders report.

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