Long-term crude oil production and prices
From October 2011 to October 2016, US crude production rose 47% to 8.5 million barrels per day. Production reached a multiyear high in June 2015. Since then, it has fallen 11%.
The price of West Texas Intermediate (or WTI) crude oil reached its high during June 2014. Since then, WTI has fallen ~57% to ~$46 per barrel. Strong production can pressure crude oil prices, subduing drilling activity.
What does this mean for OFS companies?
US crude oil production has fallen as a consequence of low crude oil prices, mostly resulting from slowing drilling activity. Oilfield equipment and services (or OFS) companies’ prices can be negatively impacted when lower drilling activity starts affected their revenues and earnings. Read more about US shale production in Market Realist’s EIA on Key Shales: Crude Oil Production to Drop in December.
The VanEck Vectors Oil Services ETF’s (OIH) price hit a multiyear high in June 2014. Since then, it has fallen 44%. OIH is an ETF tracking an index of 25 OFS companies. The ETF has closely followed WTI’s price in the past five years.
What’s OIH’s correlation with crude oil?
The average correlation coefficient of OIH and crude oil since November 2009 is 0.66. In the past year, the ratio has risen to 0.72. This high correlation reflects how the OFS industry has been affected by changing crude oil prices. Large OFS companies such as Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), and National Oilwell Varco (NOV) have strong correlations with crude oil prices. Read Market Realist’s A Look into Implied Volatility and Short Interest of OFS Stocks to know more about this.
In the following section, we’ll discuss how crude oil prices affect US rigs.