10 May

Will Rising Rigs Let Oil Prices Escape Their Fate?

WRITTEN BY Rabindra Samanta

Latest oil rig data

The US oil rig count reached 703 in the week ended May 5, 2017, which represents a rise of six rigs over the previous week, according to the latest data released by Baker Hughes (BHI). The US rig count is now at its highest level since May 1, 2015.

Will Rising Rigs Let Oil Prices Escape Their Fate?

On May 9, 2017, crude oil (DBO) (USL) (OIIL) (SCO) prices were ~57.2% lower than their post-2008 crisis high on June 20, 2014, based on closing prices. Oil prices started in a downturn on June 20, 2014, and since then, the number of active oil rigs has fallen 54.5%.

US crude oil production is now ~3.3% below its June 2015 peak, according to weekly data from the EIA (US Energy Information Administration).

Rig counts and crude oil prices

Over the past ten years, the lows and highs in the oil rig count and crude oil prices have been three to four months apart, according to research by Morgan Stanley. After the subprime housing crisis—during which crude oil prices touched multiyear lows in December 2008—the rig count bottomed out in June 2009.

Crude oil touched a 12-year low on February 11, 2016, but prices rebounded 75% by May 9, 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. Since hitting its bottom of 316 rigs in the week ended May 27, 2016, the count has more than doubled, rising by 381 rigs as of the week ended May 5, 2017.

Crude oil rigs and crude oil production

According to weekly data, between June 27, 2016, and April 28, 2017, crude oil production rose ~6.4%, reflecting the impact of the rising rig count on crude oil production.

Remember, a rising rig count will likely mean more pressure on crude oil prices. It could also impact 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 (IEZ).

Rig efficiency and oil prices

Increased rig efficiency has been helping US oil companies produce more crude oil with fewer rigs. The EIA estimates that oil production per rig from new wells will likely reach 735 barrels per day in May 2017, which would be ~30.8% higher than in May 2016.

Improved efficiency would also mean more oil from the same number of rigs in the future, and this would explain why crude oil production is not as sharply lower as the rig count since June 2014. Either way, this situation doesn’t bode well for oil prices.

Now let’s take a closer look at the role of the rising US dollar.

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