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Investors Should Look at Rigs before Placing Bets on Oil

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Latest oil rig data

The US crude oil rig count was 525 in the week ending December 30, 2016—a rise of two rigs compared to the previous week, according to data released by Baker Hughes (BHI).

On January 3, 2017, crude oil (USO) (USL) (OIIL) (SCO) prices were ~51.2% lower than their post-2008 crisis high on June 20, 2014, based on the closing prices. Oil prices started a downturn on June 20, 2014. Since then, the number of active oil rigs has fallen 66%. US crude oil production is ~8.8% lower than it was at its peak in June 2015, according to weekly data from the U.S. Energy Information Administration.

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Rig counts, crude oil production, and prices

Over the past ten years, the oil rig count’s bottoms and peaks and crude oil price’s bottoms and peaks have been between three and four months apart, according to research from Morgan Stanley. After the subprime crisis, when crude oil touched multiyear lows in January 2009, the rig count bottomed out in May 2009.

Crude oil touched a 12-year low on February 11, 2016, but it rebounded 99.7% by January 3, 2017. According to the pattern mentioned above, the rig count should have hit its bottom in June 2016.

The rig count rose for the first time in 11 weeks in the week ending June 3, 2016. The count is up by 200 rigs as of the week ending December 30, 2016—a rise of 66.1% from its bottom. During that period, crude oil production rose ~0.4%, according to weekly data. It shows the impact of rising rigs on crude oil production.

Rigs, energy companies, and oil prices

Upstream companies’ capital expenditure reductions resulted in a lower rig count and a fall in US crude oil production. Rising rig counts indicate that upstream companies are starting to increase their drilling activities. It will result in higher crude oil production and pressure prices.

Crude oil production levels impact the Fidelity MSCI Energy ETF (FENY), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the iShares US Oil Equipment & Services (IEZ).

In the next part, we’ll look at the relationship between crude oil inventories and crude oil prices.

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