7 Jun

This Is the Biggest Concern for Oil Bulls

WRITTEN BY Rabindra Samanta

Oil rigs a worry for oil bulls

The US oil rig count was at 733 for the week ended June 2, 2017, a rise of 11 compared to the previous week. On June 2, Baker Hughes (BHI) reported that the oil rig count is at levels last seen in April 2015. Since oil’s 2014 high, US crude oil (USL) (DBO) active futures have fallen 55.1%, and oil rigs have fallen 52.6%.

This Is the Biggest Concern for Oil Bulls

US crude oil production climbed to ~9.6 MMbpd (million barrels per day) in the week ended June 5, 2015. Since then, US oil producers have reduced their output 2.8% on account of lower oil prices.

Oil rig count

Since 2007, peaks and troughs between the oil rig count and crude oil prices have occurred in intervals of three to five months. For instance, crude oil prices touched multiyear lows in February 2009 after the subprime housing crisis. Oil rigs reached their low in May 2009.

In early 2016, US crude oil active futures touched their 12-year low. Based on this cycle, the oil rig count should have reached its bottom around June 2016. Active oil rigs rose for the first time in the week ended June 3, 2016, after falling for 11 weeks. Between February 11, 2016, and June 6, 2017, WTI crude oil active futures rose 83.9%. Between May 27, 2016, and June 2, 2017, oil rigs rose by 417 from a low of 316.

US oil output

Between May 27, 2016, and May 26, 2017, US crude oil output rose 6.9%. Based on the recent EIA data for the week ended May 26, US oil production is inching towards 9.4 MMbpd. Oil bulls should stay cautious of this development. Production could also impact ETFs such as the Guggenheim S&P 500 Equal Weight Energy ETF (RYE) and the Fidelity MSCI Energy ETF (FENY). Oil-related ETFs such as the United States Brent Oil ETF (BNO) could also bear the brunt of lower oil prices.

Oil rig efficacy

The EIA’s drilling productivity report estimates that oil output per rig from new wells will be at 724 barrels per day in June 2017, 28.4% higher on a year-over-year basis due to better technology. Improved efficiency is another bearish factor for crude oil prices given the rising number of rigs.

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