Oil Rigs Are a Big Hurdle in Oil’s Recovery

Latest oil rig data

The US oil rig count reached 712 in the week ended May 12, 2017, a jump of nine rigs from the previous week, according to the latest data released by Baker Hughes (BHI). The US rig count is now at its highest level since April 24, 2015.

Oil Rigs Are a Big Hurdle in Oil’s Recovery

As of May 17, 2017, crude oil (DBO) (USL) (OIIL) (SCO) prices have fallen ~54.3% from their post-2008 crisis high on June 20, 2014, when the downturn in oil prices started. Since then, oil rigs have fallen 53.9%.

Currently, US crude oil production is just ~3.1% below its June 2015 peak based on weekly data from the EIA (U.S. Energy Information Administration).

Rig counts and crude oil prices

Over the past ten years, peaks and troughs between the oil rig count and crude oil prices have been three to four months apart. For example, after the subprime housing crisis—during which crude oil prices touched multiyear lows in February 2009—the rig count bottomed out in June 2009.

Crude oil fell to a 12-year low on February 11, 2016, but prices have rebounded 87.2% as of May 17, 2017. According to the pattern outlined above, the rig count should have hit bottom in June 2016.

In the week ended June 3, 2016, the rig count rose for the first time in 11 weeks. From that point, the count has risen by 396 rigs as of the week ended May 12, 2017.

Crude oil rigs and crude oil production

Between June 27, 2016, and May 12, 2017, US crude oil production has risen ~6.6%, which shows the impact of the rising rig count on crude oil production.

So, a rising rig count could pressure crude oil prices because it increases the supply of crude oil. The rig count could be an important driver for funds such as the United States Brent Oil ETF (BNO), the Fidelity MSCI Energy ETF (FENY), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the iShares US Oil Equipment & Services ETF (IEZ).

Rig efficiency and oil prices

Better rig efficiency could also be an important concern for US oil bulls. The EIA estimates that oil production per rig from new wells will likely reach 724 barrels per day in June 2017. This is about 28.4% higher than June 2016’s production.

Rising efficiency also explains why crude oil production hasn’t fallen as sharply as the rig count since June 2014.