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What We Could Expect for Oil Prices

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Oil rig data

The US oil rig count rose by two to 766 in the week ended July 28, 2017. Year-over-year, the oil rig count has surged by more than twofold, with US crude oil active futures gaining 22.7%.

Since the high of 9.6 million barrels per day in the week ended June 5, 2015, US crude oil production has fallen 2.1%. Oil prices are 54.2% below their June 2014 high. The fall in oil prices led to a fall in oil production, with the oil rig count falling 54.4% since the week ended June 20, 2014.

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A vital pattern

Oil prices and the oil rig count have an important relationship. Usually, oil’s bottoms and peaks are three to six months ahead of the oil rig count’s. For example, in December 2008, US crude oil active futures fell to a multiyear low. After six months, the US oil rig count also fell to a multiyear low.

In another such instance, US crude oil (DBO) (OIIL) (USO) active futures tumbled to a 12-year low in February 2016. Since then, oil prices have recovered 87.6%. The oil rig count fell to 316 in the week ended May 27, 2016, 80.4% below its peak. The US oil rig count has more than doubled since then. Since May 27, 2016, US crude oil production has increased 7.9%. A further rise in the oil rig count could increase oil supplies, which could pressure oil prices. The relationship between crude oil prices, oil rigs, and oil supply is circular.

New oil production per rig could also grow, by 27.8% between August 2016 and August 2017. Moreover, Saudi Arabia’s possible cut in oil exports could open new opportunities for US crude oil producers. Therefore, a rise in US crude oil production in the next few months could keep a lid on crude oil prices. This outcome could be bearish for energy funds such as the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE).

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